May 222017
 
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Pable Picasso Le Pengouin 1907

 

US Loan Creation Crashes To Six-Year Low (ZH)
UK Has All The Ingredients For A New Credit Crunch (G.)
Media To Trump: Only Cozy Up To The Right Dictators (FAIR)
America’s Cash Cow: ‘Trump Does Not Value The Saudis, Only Their Money’ (RT)
Nassim Taleb Tells Ron Paul: “We’ll Destroy What Needs To Be Destroyed” (ZH)
How Did Russiagate Start? (Matt Taibbi)
Jeremy Corbyn Defies His Critics To Become Labour’s Best Hope Of Survival (G.)
UK Labour Pledges To Abolish Tuition Fees As Early As Autumn 2017 (G.)
China’s Tide Of Internal Migration Is Shifting (BBG)
Commodity Traders Are Stuck in a World Where Everybody Knows Everything (BBG)
Interest-Only Loans Could Be ‘Australia’s Subprime’ (AFR)
Greek Creditors Seek to Break Impasse on Stalled Bailout Review (BBG)
Syphilis Is On The Rise Because Penicillin Isn’t Profitable (Qz)

 

 

Our economies cannot function without constant new money creation by banks on the back of mortgages and other loans.

US Loan Creation Crashes To Six-Year Low (ZH)

According to the latest Fed data, the all-important C&I loan growth contraction has not only continued, but over the past two months, another 50% has been chopped off, and what in early March was a 4.0% annual growth is now barely positive, down to just 2.0%, and set to turn negative in just a few weeks. This was the lowest growth rate since May 2011, right around the time the Fed was about to launch QE2. At the same time, total loan growth has likewise continued to decline, and as of the second week of May was down to 3.8%, the weakest overall loan creation in three years.

Another loan category that has seen a dramatic slowdown since last September, when Ford’s CEO aptly predicted that “sales have reached a plateau.” Since then auto loan growth has been slashed by more than 50% and at this runrate, is set to turn negative some time in late 2017. Needless to say, that would wreak even further havoc on the US car market. For a while, despite numerous attempts at explanation, there was no definitive theory why this dramatic slowdown was taking place. It even prompted the WSJ to inquire “who hit the brakes?” Well, after the latest Fed Senior Loan Officer Survey, we may have the answer.

First, recall that in late April we showed another very troubling trend: consumer credit card default rate as tracked by S&P/Experian Bankcard had surged to the highest level since June 2013, suggesting that contrary to reports otherwise, the US consumer is increasingly unwell. A quick look at the latest Fed Senior Loan officer survey revealed even more disturbing trends. According to the report, “banks reported tightening most credit policies on Commercial Real Estate loans over the past year…. On balance, banks reported weaker demand for CRE loans in the first quarter.” Even more troubling was the continued drop in demand for C&I loans among small, medium and large corporations, with “inquiries for C&I lines of credit remained basically unchanged” staying at a modestly depressed rate.

This stark admission that in addition to declining bank supply due to tighter standard (i.e., worries about further losses), there was less demand by businesses and consumers for loans, has explained once and for all the ongoing collapse in commercial bank loan creation, both total, C&I and auto. Of the two, the declining demand for loans businesses, is by far the most concerning aspect of an economy that is supposedly growing, and where companies should be willing to take out new credit to fund expansion (instead of merely issuing bonds to buyback their stock).

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Position very similar to US. And many others, obviously.

UK Has All The Ingredients For A New Credit Crunch (G.)

A credit crunch is brewing and when it happens, the UK is going to get hurt. That is the message emerging from senior executives in the financial services industry, who do not think Britain has changed that much since the 2008 credit disaster and the devastating crash that followed. Three developments lie at the heart of this disturbing analysis: spectacular growth in the sale of second mortgages, car loans and credit cards. Second mortgages are widely seen as a signal of consumers taking on risky levels of debt that leave them vulnerable to a downturn in the economy. It was the same before the last banking crash. Tens of thousands of households, many of them struggling to pay monthly mortgage payments, used second mortgages to bypass borrowing limits set by their mortgage lender.

The latest industry figures show the number of people opting to saddle themselves with a second mortgage leapt 22% in March to its highest level since 2008. Car loans are already on the regulator’s radar. Like second mortgages, they are considered secured credit on the basis that lenders have a claim against an asset when borrowers can no longer pay monthly instalments. But cars depreciate from the moment they are bought, so they rank low down the scale of secure credit. And loans have turned in recent years into leases that have customers renewing contracts every three years, keeping them in effect permanently hooked. The main consumer regulator for the financial services industry, the Financial Conduct Authority, is reviewing the market for car leasing, which now accounts for more than 90% of car sales, to check for mis-selling to poorer households who will be vulnerable to default.

The Bank of England is also on the case. More importantly, it is also looking at the big picture and what happens if unemployment suddenly rises and a large number of households default on payments. Officials at the Bank have a growing list of concerns. Not only is there the second mortgage problem and the number of car loans: figures show consumer spending on unsecured credit has also rocketed in the last year. In March alone, the amount UK consumers owed on loans and cards grew by £1.9bn, the highest figure in 11 years. Households are known to have increased their reliance on short-term unsecured loans to buy cars and furniture, and to kit out new kitchens. Some use them to maintain their lifestyle in the face of a decade of flat wages.

Unfortunately, another group use credit to pay the monthly rent. Shelter, the homelessness charity, says one in three renters – around half a million people – on low incomes are having to borrow money to pay the rent. It said the borrowing is often from family and friends, but also on credit cards and through loans.

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Why US mainstream media are on their last legs.

Media To Trump: Only Cozy Up To The Right Dictators (FAIR)

After a series of friendly gestures by President Donald Trump toward Filipino President Rodrigo Duterte and Egypt’s Abdel Fattah el-Sisi over the past few months, US media have recoiled with disgust at the open embrace of governments that ostensibly had heretofore been beyond the pale. “Enabling Egypt’s President Sisi, an Enemy of Human Rights,” was the New York Times‘ editorial position (4/4/17)—followed by “Donald Trump Embraces Another Despot” (5/1/17). A week later, Sen. John McCain (R.-Ariz.) lectured Secretary of State Rex Tillerson on the Times op-ed page (5/8/17) on “Why We Must Support Human Rights.” “How Trump Makes Dictators Stronger” was Washington Post columnist Anne Applebaum’s lament (5/1/17). “Trump keeps praising international strongmen, alarming human rights advocates,” reported an upset Philip Rucker (Washington Post, 5/2/17).

Post contributor Tom Toles (5/2/17) added, “Trump invites ruthless dictators to the White House.” Trump had gone too far, was the media message, crossing a line with his enthusiastic outreach to brutal tyrants. So the Trump administration’s announcement of a plan for not just a friendly visit to Saudi Arabia—scheduled for May 20–21—but also the sale of up to $300 billion in weapons to the oppressive regime, must have provoked the same outcry from these critics, right? Actually, no. Thus far, the LA Times, CNN, NBC, MSNBC, CNN, ABC and CBS haven’t reported on Trump’s massive arms deal with Saudi Arabia, much less had a pundit or editorial board condemn it. Saudi Arabia’s war on Yemen has killed at least 10,000 civilians, resulted in near-famine conditions for 7 million people and led to a deadly cholera epidemic—all made possible with US weapons and logistical support.

John McCain, whose New York Times op-ed was unironically shared by dozens of high-status pundits, aggressively backs Saudi Arabia’s brutal bombing of Yemen, and has called for increased military support to the absolute monarchy. The New York Times hasn’t written an editorial about Saudi Arabia since October of last year (10/1/16), when, for the second time in the span of a week, the paper defended the regime against potential lawsuits over its role in the 9/11 attacks. When the Times does speak out on the topic of Saudi Arabia, it does so to run interference for its possible connection to international terrorism.

Nice words to the wrong dictators unleash a torrent of outrage from our pundit class. Nice words to the right dictators—along with billions in military hardware, which unlike nice words will be used to continue to slaughter residents of a neighboring country and suppress domestic dissent–result in uniform silence. Not a word from Anne Applebaum, no condemnation from Philip Rucker, no moral preening from Sen. John McCain, no sense that any line had been crossed from the New York Times editorial board. The US’s warm embrace and arming of the Saudis is factored in, it’s bipartisan, and thus not worthy of outrage.

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NassimNicholasTaleb on Twitter:

“What @realDonaldTrump is doing: sucking in the last $100 billion before the bankruptcy of SaudiBarbaria. If anything, cruel to the Saudis.”

America’s Cash Cow: ‘Trump Does Not Value The Saudis, Only Their Money’ (RT)

RT: Trump signed a $110-billion dollar arms deal with Saudi Arabia. How do you think this is going to be received in the US and in the wider international community?

Sharmine Narwani: Not very well. We’ve seen what the Saudis have done with arms in the last six years or so. To understand why this administration is upping arms sales to the Saudis, we have to go back a little bit. In 2010, 2011 at the start of the Arab Spring, the Saudis signed contracts for over $65 billion at that time, the largest ever. And then here we are a number of years later. And the numbers are 110, possibly up to $300 billion. And the reason behind this is basically after the failures of the US intervention in Iraq and invasion of Afghanistan, the Americans were no longer willing to sacrifice blood and treasure, and moving forward they were going to use local proxies to fight their wars. And Saudi Arabia is willing and able to fight wars in Syria, in Iraq, in Yemen on behalf of the American administration. But unfortunately, to no avail; these are not winnable wars. And at this point, I think Trump is looking at them as a cash cow.

RT: Trump says he wants to help bring peace to the Middle East. But does striking such a huge arms deal right off the bat send the right signal?

SN: Peace is a relative term. What do the Americans and what does the Trump administration mean by peace, for starters? Peace means the status quo, it means the Americans continue to exercise hegemony over the region, and that is not possible with an empire in decline. So, I think right now what we are seeing with the Trump administration headed by Jared Kushner, his son-in-law, spearheading an effort to create what they are calling the Arab NATO, which is a peace deal struck over the Israel-Palestine conflict in which the Saudis and the Gulf States and other Sunni states will agree to some kind of a solution there in order to cooperate with Israel to target Iran. So, in fact, we are going to see an escalation, not peace.

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“We have today so many people sitting in the New York Times Washington office, in an air conditioned office, who can dictate foreign policy with zero risk.”

Nassim Taleb Tells Ron Paul: “We’ll Destroy What Needs To Be Destroyed” (ZH)

Just how homogenous is the U.S. foreign policy elite? Remember that through the end of Hillary Clinton’s tenure as Secretary of State in 2013, either a Bush or a Clinton held one of the three highest offices in the U.S. – the presidency, vice presidency or secretary of state – for eight straight terms. Another reason why interventionist foreign policy often fails is because federal-government bureaucrats and other outsiders don’t have “skin in the game” – an entrenched interest, financial or of another sort, in the conflict – and therefore, are incapable of achieving a comprehensive understanding of the situation. That goes for both elected leaders, beauracrats, and the media. “We have today so many people sitting in the New York Times Washington office, in an air conditioned office, who can dictate foreign policy with zero risk.”

Dr. Paul seized the opportunity to criticize the “Chickenhawks” who advocate interventionism, but avoided serving in the military during Vietnam. “I don’t fault them for trying to avoid the war, but I fault them for advocating war,” Paul said. Many still haven’t internalized the lesson of the 2007-2008 economic crash and how the monetary policy missteps made by former Fed Chairman Alan Greenspan helped cause the crash. As a result, throughout human history, “we’ve never had so many people transferring risk to others,” Taleb asserts. One reason these actors have been allowed to remain in power is that it’s difficult to assign blame to individuals when you’re dealing with “macro” conflicts like the Syrian conflict that involve many different state actors.

This is one reason the policy elite at the State Department – whom Taleb compared to doctors from ancient times, who inflicted more harm than healing on their patients – have managed to stay in power, while a modern-day doctor who was causing an unusual number of patient deaths would quickly be barred from practicing. Turning the conversation toward the asset bubbles that have continued growing since the last crisis, Taleb explained how Greenspan’s discovery that he could stabilize markets by slashing interest rates has led to our current struggle with unprecedented debt creation and a belief in “perpetual wealth and perpetual growth.” “Lowering rates in such a manner leads to distortions. If we didn’t have a Fed, we’d be better off because the price of money would be negotiated between people.”

[..] Whatever happens to the Federal Reserve -if it’s allowed to continue monetizing debt or not – it may not matter. Because digital currencies like bitcoin, which are quickly growing in popularity and value, could one day supplant the use of fiat currencies altogether, Taleb said. During the last U.S. election, people showed that they aren’t “victims of the New York Times.” Moreover, Twitter has helped upend the media power structure in favor of the people and independent thought. “Trump was elected in spite of 264 top newspapers wanting him to lose,” Taleb noted, adding that he believes the future will be “a libertarian dream.” “We will destroy what needs to be destroyed, and build what needs to be built,” he said.

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Taibbi is crawling back a little.

How Did Russiagate Start? (Matt Taibbi)

[..] there was no way to listen to the March 5th interview and not come away feeling like Clapper believed he would have known of the existence of a FISA warrant, or of any indications of collusion between the Trump campaign and Russia, had they existed up until the time he left office on January 20th of this year. Todd went out of his way to hammer at the question of whether or not he knew of any evidence of collusion. Clapper again said, “Not to my knowledge.” Here Todd appropriately pressed him: If it did exist, would you know? To this, Clapper merely answered, “This could have unfolded or become available in the time since I left the government.” That’s not an unequivocal “yes,” but it’s close. There’s no way to compare Clapper’s statements on March 5th to his interviews last week and not feel that something significant changed between then and now.

Clapper’s statements seem even stranger in light of James Comey’s own testimony in the House on March 20th. In that appearance, Comey – who by then had dropped his bombshell about the existence of an investigation into Trump campaign figures – was asked by New York Republican Elise Stefanik when he notified the DNI about his inquiry. “Good question,” Comey said. “Obviously, the Department of Justice has been aware of it all along. The DNI, I don’t know what the DNI’s knowledge of it was, because we didn’t have a DNI – until Mr. Coats took office and I briefed him his first morning.” Comey was saying that he hadn’t briefed the DNI because between January 20th, when Clapper left office, and March 16th, when former Indiana senator and now Trump appointee Dan Coats took office, the DNI position was unfilled.

But Comey had said the counterintelligence investigation dated back to July, when he was FBI director under a Democratic president. So what happened between July and January? If Comey felt the existence of his investigation was so important that he he had to disclose it to DNI Coats on Coats’ first day in office, why didn’t he feel the same need to disclose the existence of an investigation to Clapper at any time between July and January? Furthermore, how could the FBI participate in a joint assessment about Russian efforts to meddle in American elections and not tell Clapper and the other intelligence chiefs about what would seemingly be a highly germane counterintelligence investigation in that direction?

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If Corbyn doesn‘t beat May, it’ll be due to his own party members. Corbyn equals Sanders in many ways. Left wing parties, to avoid oblivion, must be drastically changed and rebuilt. But vested interests make that very hard in both the UK and US.

Jeremy Corbyn Defies His Critics To Become Labour’s Best Hope Of Survival (G.)

In 2009 the Greek Socialist party, Pasok, entered government with 44% of the vote; by 2015 it was down to seventh, with just 5%. The party’s demise coincided with, and was arguably precipitated by, the rise of the more leftwing Syrza, which went from 5% and fifth place to 36% and government within the same period. This dual trajectory gave rise to the term Pasokification: the dramatic decline of a centre-left party that is eclipsed by a more leftwing alternative. A word was needed for it because there’s a lot of it about. Earlier this month the French Socialist party came fifth in the first round of the presidential election with just 6% of the vote, while the hard left won 20%; back in 2012 the Socialists came first with 28% and went on to win the presidency. In Holland the PvdA, the mainstream social democratic party, won 6% in March and came 7th while the GreenLeft coalition won 9%; back in 2012 the PvdA came second, with 25%.

Less pronounced versions of the same dynamic have occurred across the continent. When parties created to represent the interests of working people in parliament decide instead to make working people pay for the crisis in capital they get punished, and ultimately may be discarded. Anyone who believes that Labour is immune from this contagion just needs to take a look at Scotland, where the party went from 41 seats in 2010 to just one in 2015, before Corbyn was elected leader. To understand the Labour party’s fortunes in this election outside of this trend would be like looking at each national uprising during the Arab spring in 2011, or the collapse of Eastern bloc dictatorships in 1989, as being somehow wholly discrete from each other.

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Bold move. But there’s only two weeks left.

UK Labour Pledges To Abolish Tuition Fees As Early As Autumn 2017 (G.)

New university students will be freed from paying £9,000 in tuition fees as early as this autumn if Labour wins the election, Jeremy Corbyn will say on Monday. The Labour leader and Angela Rayner, his shadow education secretary, will say tuition fees will be completely abolished through legislation from 2018 onwards. But students starting courses in September will have fees for their first year written off retrospectively so as not to encourage them to defer their studies for a year. Labour said it would seek to provide free tuition for EU students and push for reciprocal arrangements at EU universities as part of the Brexit negotiations. Students who are partway through their courses would no longer have to pay tuition fees from 2018, meaning those starting their final year of study in September would be the last cohort liable for the £27,000 of debts to be paid back when graduates pass an earnings threshold.

Labour said those students would be protected from above-inflation interest rate rises on their debts and the party would look for ways to reduce the burden for them in future. “The Conservatives have held students back for too long, saddling them with debt that blights the start of their working lives. Labour will lift this cloud of debt and make education free for all as part of our plan for a richer Britain for the many not the few,” Corbyn will say. “We will scrap tuition fees and ensure universities have the resources they need to continue to provide a world-class education. Students will benefit from having more money in their pockets, and we will all benefit from the engineers, doctors, teachers and scientists that our universities produce.”

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And then they run out of ‘cheaper’ areas. But at least there’s new space to build ghost cities in.

China’s Tide Of Internal Migration Is Shifting (BBG)

Growth in China’s economy has long centered on the coast, where Shanghai and the Pearl River Delta form some of the world’s most productive regions on their own. But now that tide of internal migration that drew hundreds of millions of workers from the farm to factory is shifting, and lifting the economic prospects of the country’s interior.As big-city living costs rise and job openings become less abundant, more migrants are now leaving China’s urban centers than new ones arriving, according to Oxford Economics. “Labor costs on the East Coast are now too high for industries further down the value chain to remain competitive internationally,” London-based economist Alessandro Theiss wrote in a report, citing an 8 million decline in the migrant population from 2014 to 2016.

The shift should benefit inland provinces, especially in southwest regions like Sichuan, as companies move production to take advantage of lower costs while remaining connected to coastal export hubs and industrial clusters, he said. Southern and northwestern provinces are are likely to keep expanding relatively fast as they benefit from catch-up growth, fiscal support and geographic location, while the northeast is likely to remain the slowest-growing region as population declines and coal mining consolidates more in inland provinces, according to Theiss. While the east coast was hit by slower global trade in recent years, conditions are now improving. Specialized manufacturing clusters and export hubs are innovating and moving up the value chain, and research activity is boosting the region.

That’s good news for some of China’s biggest drivers: Coastal Guangdong, Jiangsu and Shandong provinces each account for around 10% of national output and all had output last year that exceeded Mexico’s, Theiss said. The future looks favorable for east coast provinces with more mature economies, as well as those in central China.

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If “Everybody Knows Everything”, the markets must be rigged if anyone wants to make any money.

Commodity Traders Are Stuck in a World Where Everybody Knows Everything (BBG)

For commodity traders operating in the Information Age, just good old trading doesn’t cut it anymore. Unlike the stock market in which transactions are typically based on information that’s public, firms that buy and sell raw materials thrived for decades in an opaque world where their metier relied on knowledge privy only to a few. Now, technological development, expanding sources of data, more sophisticated producers and consumers as well as transparency surrounding deals are eroding their advantage. “Everything is transparent, everybody knows everything and has access to information,” Daniel Jaeggi, the president of Mercuria Energy Group, said on Thursday at the Global Trader Summit organized by IE Singapore, a government agency that promotes international trade.

Sitting next to him at a panel discussing ‘What’s Next for Commodity Trading: Drivers, Disruptors and Opportunities’, Sunny Verghese, the chief executive officer of food trader Olam International Ltd., lamented declining margins. “The consumers and producers are trying to eat our lunch. So we got to be smart about differentiating ourselves,” he said. As market participants’ access to information increases, the traders highlighted the need to more than simply buy and sell commodities as profits from arbitrage – or gains made from a differential in prices – shrinks. That means getting involved in the supply chain by potentially buying into infrastructure that’s key to the production and distribution of raw materials, and also providing financing for the development of such assets.

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Interest only loans are deadly weapons. Lots of them in various EU countries too.

Interest-Only Loans Could Be ‘Australia’s Subprime’ (AFR)

High-risk mortgage loans to young families, professionals and other over-extended borrowers amounting to more than six times household incomes could wipe out 20% of the major banks’ equity base, institutional investment fund JCP Investment Partners has warned. The fund manager’s study warns that official estimates of average household indebtedness are depressed by the sizeable number of mortgages that are effectively full paid off. In a proprietary study of the nation’s record high-and-growing household debt mountain, the Melbourne-based fund said Irish-style housing losses for the bigger-than-recognised pool of riskier borrowers could wipe out half of the banks’ equity capital.

Interest-only loans, said JCP – which is one of three Australian equities managers appointed by the Future Fund – could be “Australia’s sub-prime”. As regulators crack down on interest-only lending and the Turnbull government’s decision to introduce a bank levy drives up the cost of loans, “only time will tell if such households can afford the mortgages they have”. The dramatic warning echoes concerns raised by Reserve Bank of Australia governor Philip Lowe this month that rising household debt had made the economy more vulnerable, and that it was unclear how stretched consumers might behave in a crisis.

It also follows a review by Australian Prudential Regulation Authority chairman Wayne Byres of bank capital requirements for housing exposures, given the “notable concentration in housing”, announced at The Australian Financial Review Banking and Wealth Summit last month. Among the biggest concerns is what may happen when households feel they can no longer service their loans, for instance, as borrowing costs are reset higher or those with interest only mortgages are forced to repay the principal as well. That creates a negative feedback loop – experienced by Ireland after the financial crisis – in which stressed borrowers slash their spending, in turn crunching the economy, driving up unemployment and adding to downward pressure on house prices.

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They seek to break Greece, not the impasse.

Greek Creditors Seek to Break Impasse on Stalled Bailout Review (BBG)

Euro-area finance ministers gather in Brussels on Monday to try to clinch a deal on easing Greece’s debt burden, which would resolve a stalled review of the country’s bailout and pave the way for a new set of rescue loans. While Greece and its bailout supervisors have agreed on economic overhauls, the completion of the country’s review has been held back by disagreements between key creditors over how much debt relief is needed. At the heart of the impasse lies the IMF’s reluctance to participate in a bailout unless the euro area takes further steps to ensure the country’s €315 billion ($353 billion) debt load becomes sustainable. Some nations like Germany, which is resisting changes to Greece’s debt profile, won’t release any new funds until the IMF joins the program. Athens needs its next aid installment of around €7 billion before it has to repay lenders in July.

A global agreement on Greek debt “is within reach and it’s vital,” EU Economic and Monetary Affairs Commissioner Pierre Moscovici said in an interview on France Inter radio on Sunday. Additional debt relief is also necessary for the ECB to include Greek bonds in its asset purchases program, which would ease the country’s access to bond markets. EU officials see chances for a deal on Monday at 50-50, and point to a meeting of euro-area finance ministry deputies ahead of the ministers’ gathering, which will determine the likelihood of an accord. A key issue of contention is the outlook for Greece’s economy after 2018, when the current bailout expires. The IMF has raised doubts about Greece’s ability to maintain such an optimistic budget performance for decades, while key creditors have been pushing for a more positive outlook. Less ambitious fiscal targets would increase the amount of debt relief needed.

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Celebrate capitalism. While you’re alive.

Syphilis Is On The Rise Because Penicillin Isn’t Profitable (Qz)

At least 18 countries, including South Africa, the US, Canada, Portugal, France, and Brazil, have faced shortages of benzathine penicillin G over the last three years, according to the World Health Organization (WHO). With only a few companies in the world still manufacturing the medicine, countries can’t find enough supply of the drug that changed modern medicine 76 years ago. Penicillin was discovered in 1928, but it really took off during World War II. In the early 1940s, a US government-led program brought together around 20 commercial firms, plus government and academic research laboratories, who collaborated to scale up penicillin production to supply the military. The goal, according to the book Sickness and Health in America, was to have enough penicillin for the troops landing in France in June 1944.

In March 1945, penicillin was, for the first time, made available for consumers across the US. It’s efficacy made it popular: by 1949, the US annual production of penicillin was 1.3 trillion units—compared to the relative pittance of 1.7 billion units in 1944.\ Penicillin was one of the great achievements of modern medicine. It was the first drug of its kind, considered a miracle, and ushered in the era of antibiotics. Before penicillin, any cut could kill if it got infected; surgeries of any kind could be fatal; and bacterial infections such as strep throat could kill. Gonorrhea, syphilis, and other sexually transmitted illnesses were basically a death sentence. But a single shot of benzathine penicillin G was enough to kill the first stages of syphilis, which had plagued humankind for over 500 years. It could also cure gonorrhea and other infectious disease. Today, benzathine penicillin G is still the most effective drug against deadly diseases such as rheumatic heart disease and syphilis.

[..] Today, just four companies in the world still produce the active ingredient for benzathine penicillin G. Three are in China: North China Pharmaceutical; CSPC Pharmaceuticals; Jiangxi Dongfeng Pharmaceutical. Austria-based Sandoz is the only producer of the active ingredient for benzathine penicillin G in the Western world. Together, these producers have the capacity to deliver up to 600 metric tons of benzathine penicillin G a year, but they produce less than 20% of that. “There is no money in penicillin,” says Amit Sengupta, the New Delhi-based global coordinator of the People’s Health Movement. A shot of benzathine penicillin G typically costs between $0.20 and $2.00, and usually all you need is one—strep throat and syphilis are both cured with a single injection of penicillin.

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May 092017
 
 May 9, 2017  Posted by at 8:13 am Finance Tagged with: , , , , , , , , , , ,  4 Responses »
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Pablo Picasso Self portrait 1938

 

Macron Is Not The Solution To Europe’s Top Existential Threat (CNBC)
“Europe’s Not Out Of The Woods With Macron Win” (ZH)
Commodities Send Ominous Signal On Global Economy (BBG)
Traders Are Fleeing the Options Market (WSJ)
The Debt-Bubble Landmine Obama Left For Trump (NYP)
Canadians Buy Record Number of New Cars With Record Amount of Financing (BD)
Majority of Consumers Now See Canadian Home Prices Rising (BBG)
Over 50% of Canadians $200 or Less Away From Not Being Able To Pay Bills (Gl.)
Quebec’s Finance Minister: Don’t Dawdle on NAFTA Overhaul (BBG)
Chinese Stocks Head For Longest Losing Streak In 3 Years (BBG)
How China Keeps Its Financial System From Collapsing (ZH)
Parts of Asia Will Grow Old Before Getting Rich, IMF Warns (BBG)
Italy Adds Bum Note To Macron’s Ode To Euro Zone Joy (R.)
The Rock-Star Appeal of Modern Monetary Theory (Nation)
To Bury Nuclear Waste, Dig Deeper Than Yucca Mountain (BBG)
Dangerous Times in the Aegean and Cyprus (K.)
New Refugee Center Planned On Chios As Tensions Simmer (K.)
Nearly 200 Missing, 11 Dead As Migrant Boats Sink Off Libya (AFP)
Hundreds Of Migrants Feared Dead In Mediterranean Over Weekend (R.)

 

 

Macron wants Eurobonds, anathema to Germany et al because they would allegedly “sharply reduce each euro zone government’s motivation to pursue sensible fiscal policies..”.

Many in Brussels want a banking union, anathema to quite a few countries. There is no democratic way that leads to such a union. It’s like handing the EU the keys to your country.

Macron Is Not The Solution To Europe’s Top Existential Threat (CNBC)

The future of the euro zone is dependent on a common commitment to solid government finances, says Commerzbank’s chief economist, and France’s new president-elect does not bring the bloc any closer to achieving this reality. The pro-EU and centrist candidate, Emmanuel Macron, stormed to victory against his far-right political rival, Marine Le Pen, on Sunday and is now poised to become France’s youngest ever premier. However, the former economy minister is in favor of joint bond issuance which, according to Jörg Krämer, would sharply reduce each euro zone government’s motivation to pursue sensible fiscal policies. “The EU can’t keep feeling its way from one election to the next. At some point an election might go the wrong way – and if that happens in a large country, the survival of the monetary union would be in jeopardy,” Krämer said in a note.

Commerzbank’s chief economist also warned the repeated near misses of anti-EU political leaders in several European elections in recent years would not last forever and suggested the monetary union’s survival now rests on the bloc’s ability to create a genuine banking union. “To lay these existential risks to rest, the euro zone at long last needs a common commitment to solid government finances. The monetary union’s long-term survival depends on it. But new French President Macron won’t bring this any closer to reality,” he added. Meanwhile, just one day after the pro-business and market-friendly candidate Macron secured his country’s presidential election, EC President Juncker publically lambasted high state spending in the euro zone’s second largest economy. “With France, we have a particular problem … The French spend too much money and they spend too much in the wrong places. This will not work over time,” Reuters reported him as saying in Berlin on Monday.

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Le Pen would have lost against anyone. But tons of Europeans still don’t like what the EU has become. All it takes is a candidate somewhere who’s not Le Pen or Wilders.

“Europe’s Not Out Of The Woods With Macron Win” (ZH)

It appears the chairmen of UBS have plenty to say on Europe.Following former UBS chairman Peter Kurer’s comments that “to the elites, the EU is a means to get rich quickly and export their problems,” UBS current chairman Axel Weber has warned bankers that Europe is not “out of the woods” from its political risks even after Emmanuel Macron’s reassuring victory in the French presidential election. Peter Kurer recently remarked on the end of the Euro…

“Following an unfortunate combination of wrong decisions at the top and the uncontrolled flourishing of a self-serving bureaucracy, the union has moved in a direction where it has become a prisoner of its own constructed reality. The EU was a great idea but it has been ridden to death. Back in 1992, almost half of Swiss voted to join the European Economic Area, including the traveller. If there was a vote today on joining the union, the latest polls say just 15% would vote yes. The EU had its chances. It squandered them, and maybe it will come to an end in the foreseeable future under the weight of its burdens: La messa e finita, andate in pace.”

And over the weekend speaking in Tokyo, as the FT reports, UBS Chairman Axel Weber said that political risk in Europe remained “actually quite high” even though “we’ve seen the centre hold in France” with Macron’s victory over far-right candidate Marine Le Pen, and even though all the signs were that the centre will also hold in the upcoming German location elections.

“That doesn’t mean Europe is out of the woods,” he told the International Institute of Finance’s spring meeting. “There is still Italy where it is very unclear that the centre will hold. And there is still Greece.” He continued: “Where you find some bright side….there are (also) some downside risks that are not really priced into the market but could derail (Europe).” “Brexit is a time bomb… and the countdown is on. It will be two years from now,” Mr Weber said. He added that “if the British really do leave the customs union and single market there could be a lot of volatility which could impact on the global economy”.

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How long can bubbles hold?

Commodities Send Ominous Signal On Global Economy (BBG)

By almost any measure last week was a bad one for commodities, as practically every part of the market lost value. West Texas Intermediate crude oil fell under $44 per barrel, Brent crude broke below $50 per barrel and copper tested $5,500 per metric ton. In China, coal and iron ore tumbled. Gold, the supposed ultimate haven, dropped to almost $1,225 per ounce. Last week’s purge capped a steady decline in prices since mid-April and, more broadly, since February based on the Bloomberg Commodities Index. Although much of the blame is being tied to rather high and growing inventory levels, a lack of real demand shouldn’t be discounted. The market is experiencing something greater than a technical correction or speculative positioning. It is signaling something ominous about the state of the global economy.

So while Friday saw a small recovery, it appears to be merely a “dead cat bounce” rather than a sign of any market bottom. Traders have reason to question global economic strength. They are concerned about fresh signs of an over-extended Chinese economy and an ongoing slowdown in developed markets faced with aging demographics. In the U.S., they question President Donald Trump’s infrastructure promises along with his administration’s relaxed standards in the mining and drilling sectors, whose commodities we already have too much of. OPEC’s output cuts have failed to do enough to stymie the global oil glut as U.S. drillers add to their rig counts. Such negative sentiment has carried through in the equity markets, particularly among commodity-producing nations such as Australia, Canada and Brazil.

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A liquidity problem. And a confidence one.

Traders Are Fleeing the Options Market (WSJ)

Falling volumes and spiraling costs are pushing trading firms out of U.S. options, raising concerns about fragility in a market that investors rely on to protect portfolios. Trading has dwindled in most areas of the market, and investors and traders are grappling with increasing fragmentation. Liquidity, the crucial ability to do trades without significantly moving prices, has deteriorated, according to interviews with market participants and data reviewed by The Wall Street Journal. Options on key indexes, exchange-traded funds and high-volume stocks dominate trading. Meanwhile, there is less activity in the rest of the listed U.S. options world. The stresses prompted at least six prominent options market makers to exit from the business since 2012. Market makers are firms willing to both buy and sell using automated programs.

Thomas Peterffy, a pioneer of electronic options trading, said in March that his firm, Interactive Brokers, would pull the plug on options market making. KCG Holdings announced its exit from retail options market making last year, while UBS and Credit Suisse have also left automated options market making. JP Morgan and Bank of America made similar decisions in 2014, according to people familiar with the matter. “Most market makers congregate in the highly traded products,” Mr. Peterffy said in an interview. “It’s difficult for a market maker to maintain hundreds of thousands of bids and offers all the time.” It is hard to pinpoint what triggered the trader exodus, but industry experts say as firms leave, liquidity gets further drained, which spurs more market makers to retrench.

The dangerous feedback loop could sap appetite for options, key derivative securities that investors use to manage risk in their portfolios. “We could ill afford to lose any more market makers at this junction,” said Alan Grigoletto, who previously worked at the Boston Options Exchange, and now runs Grigoletto Consulting while trading options in his retirement account. Data show the liquidity bifurcation. Index and ETF options volume rose in April by 28% and 4%, respectively, data from the Options Clearing Corporation show. Meanwhile, total equity options volume shrank by 10% from the prior year.

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The car loans issue keeps growing.

The Debt-Bubble Landmine Obama Left For Trump (NYP)

President Trump came in for much jeering when he told reporters he had “inherited a mess” from President Barack Obama. On the economy, though, Obama did indeed leave behind a hidden mess: a seemingly healthy jobs market dependent on cheap debt. When this debt bubble bursts, just as the last one did, the manufacturing jobs Trump wants to save will be in even greater peril. [..] who is borrowing for used cars – and at much higher interest rates – is a huge concern. People with not-great credit scores have always made up about a fifth of the auto-loan market. But the percentage of people borrowing even though they have really bad credit scores has surged, reports Bloomberg. It’s now a third of the subprime auto-bond market, up from just 5% seven years ago. A Standard & Poor’s analysis of just one big subprime auto bond tells the story.

Last week, a company called DriveTime, which sells used cars in 26 states to people with bad credit, was in the market to issue $442 million worth of bonds backed by auto loans. The average credit score of borrowers was 538 — indicating a history of serious default. And, as S&P notes, “today’s subprime customer appears to be . . . weaker . . . than that of several years ago,” because people who defaulted right after the housing crash at least had the excuse that they were caught up in a global bubble. These loans are for people who have no choice but to borrow to buy a car, and no bargaining power on the interest rate they pay: close to 20%. Even though the borrowers pay through the nose, they depend on cheap global credit. With interest rates still near record lows, lenders have to take ever more risk in a low-interest-rate environment to make a little money.

As for that risk: Delinquency rates are rising, with 4.32% of subprime borrowers in general at least 60 days late last year, up from 3.52 two years earlier, says S&P. The bigger risk here isn’t the risk to investors, though. The auto-loan market is still much smaller than the housing market, and the investment world hasn’t created trillions of dollars of derivative securities based on this market (at least not that we know of). And unlike with houses, no one ever expects the value of a car to increase with use. No, this bubble presents a much more direct risk to the economy — and manufacturing jobs. If people with terrible credit can’t borrow an average of nearly $18,000 to buy a used car (what the DriveTime customer pays), the market for used cars collapses. That, in turn, affects the market for new cars. Indeed, the US auto industry has seen sales decline this year, after clocking half a decade of record highs.

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Canadians do the subprime car thing too.

Canadians Buy Record Number of New Cars With Record Amount of Financing (BD)

Canadians aren’t just buying real estate, they’re also treating themselves to new cars. According to a new release from Statistics Canada, sales of new cars reached a record high for February. Great for automobile manufacturers, but not so great for the economy. Debt-fuelled financing makes this more of a warning sign than a boom-time trend. Sales of new motor vehicles across Canada rose to an all-time record for February. The month saw 125,284 sales – a 2.74% increase from the same time last year. The largest segment of sales were seen in Ontario, where 41% of them occurred. This is up slightly from 2016, where Ontario accounted for 39% of sales. Booming real estate prices, and massive numbers for car sales… Ontario better be facing the greatest economy its ever experienced, or it’s in trouble.

Consumers are purchasing more expensive vehicles too. Over $5 billion was spent on new vehicles for the month, bringing the average to $40,100 – up 3.4% from the same time last year. Ontario was below the average for the country, where the average price was $39,400. While prices are lower in Ontario, they’re not exactly budget vehicles either. The uptick in average sale price is due to longer financing terms for buyers. According to the Financial Consumer Agency of Canada (FCAC), Canadians are “increasingly purchasing more car than they can afford,” due to longer financing becoming fashionable. The agency notes that average leases have crept up 2 months, every year since 2010. According to the Bank of Canada (BoC), the average loan was 74 months as of 2015.

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The Canadian debt issue is turning into a total craze.

Majority of Consumers Now See Canadian Home Prices Rising (BBG)

Expectations for Canada’s housing market are heating up, with more than half of respondents in a weekly telephone survey predicting home prices will rise, the first time the measure has topped 50% in records dating back to 2008. The bullishness comes even as a run on deposits at Toronto-based mortgage lender Home Capital leads to heightened scrutiny of a market which policy makers have said is divorced from economic fundamentals. The broad Bloomberg Nanos Canadian Confidence Index fell to 59 in the week ended March 5. Some 50.1% of respondents said they expect local home prices to rise. The figure has climbed for six straight weeks and is higher than the average for the series of 37.1%. Thepercentage of people surveyed in the week ending May 5 who said local home prices will decline in the next six months slid to 10% from 10.7%.

“Consumer sentiment on real estate has gone from hot to hotter,” said Nanos Research Group Chairman Nik Nanos. Housing has led the world’s 10th largest economy over most of this decade as exporters have struggled. The latest burst of housing momentum has led policy makers to question whether it’s being led by supply and demand or by speculation. The Ontario Securities Commission opened hearings into whether Home Capital failed to properly disclose an internal probe into fraudulent mortgage applications, a shakeup in a nation lauded for having the world’s safest banks. The latest Toronto figures also showed prices up 25% in April from a year earlier, still close to the 30% March pace that Ontario Finance Minister Charles Sousa called unsustainable on April 20 when he imposed a foreign buyers tax. Those events haven’t led to more bets on a price decline either, and housing optimists now outnumber pessimists by a factor of five to one.

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So much in debt they can’t pay their bills. Maybe someone should take a look at Canadian inequality, too.

Over 50% of Canadians $200 or Less Away From Not Being Able To Pay Bills (Gl.)

More than half of Canadians are living within $200 per month of not being able to pay all their bills or meet their debt obligations, according to a recent Ipsos survey conducted on behalf of accounting firm MNP. “With such a small amount of wiggle room, any kind of unanticipated hardship, such as a job loss or even a car repair, could send an already struggling family into financial despair,” said Grant Bazian, president of MNP’s personal insolvency practice, which is one of the largest in Canada. For 10% of Canadians, the margin of error when it comes to household finances is even thinner, at $100 or less. But those with anything at all left at the end of the month were in better shape than many: A whopping 31% of respondents said they already don’t make enough to meet all their financial obligations.

Debt is causing Canadians a fair bit of stress, the polling suggests, but few appear to be on track to buff up their monthly financial cushion. Two-thirds of survey takers said they are “less than very confident” about their ability to create an emergency fund. Another hair-raising finding from the survey: Roughly 60% said they don’t have a firm grasp of how interest rates affect debt repayments. The statistic helps explain why many indebted Canadians end up taking on more debt and high-cost loans, said Bazian. “That’s how so many end up in an endless cycle of debt,” he noted. But the data also raises the question of whether Canadians understand the implications of an interest rate hike by the Bank of Canada (BoC). A decision by the BoC to start lifting its key policy rate from historic lows would raise the cost of carrying debt across the country.

The Bank uses interest rates, among other tools, to influence inflation and economic activity. Many economists believe it could start to raise rates in the first half of 2018, as economic growth picks up pace. Although the BoC will probably lift rates gradually and over time, the impact on Canadian wallets will be substantial. For example, as Global News has reported before, a onepercentage point rise in the BoC’s key interest rate would likely push up variable mortgage rates by a similar amount. A variable mortgage rate that’s currently set at 3%, for example, would go up to 4%, which represents a 33% increase in interest payments for the mortgage holder. That’s an extra $83 a month for every $100,000 in outstanding mortgage debt.

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Quebec has strong US trade ties.

Quebec’s Finance Minister: Don’t Dawdle on NAFTA Overhaul (BBG)

Quebec Finance Minister Carlos Leitao has a message for government officials considering a renegotiation of NAFTA: Time is of the essence. “If we are going to renegotiate Nafta, then let’s do it,” Leitao said in an interview Friday at Bloomberg headquarters in New York. “The worst case scenario would be if we spend years talking about renegotiating, but don’t actually do it and it just keeps hanging around and doesn’t get addressed. The longer it drags on, the bigger the real impact on investment.” Canadian Prime Minister Justin Trudeau is facing a lengthy trade battle with the U.S., which also includes calls for a new softwood lumber pact and Donald Trump’s complaints about Canada’s system of protectionist dairy quotas.

It’s all set to drag on as the president has yet to trigger a 90-day notice period to Congress to renegotiate Nafta. The last softwood lumber dispute lasted five years. “The problem with the uncertainty is we don’t know what kind of process we will have,” Leitao said. “Is this going to be along the same lines as the last Nafta negotiations? That was very systematic. There were panels on various issues. It’s that kind of certainty that we would like. The actual nuts and bolts will take time.” Leitao has good reason to be wary of protracted trade battles, with his most recent budget already predicting Quebec’s economic growth will lag behind the Canadian average. Output in Quebec will grow 1.7% this year before slowing to 1.6% in 2018, budget forecasts show. That’s less than the 2.2% and 2.3% forecast for all of Canada over the same period.

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Deleveraging.

Chinese Stocks Head For Longest Losing Streak In 3 Years (BBG)

Chinese stocks pared declines, with technical indicators signaling that a five-day slide may have been overdone. The Shanghai Composite Index was little changed at 3,077.78 as of 1:07 p.m. local time, after declining as much as 0.7% earlier in the day. Consumer shares were the worst performers on the CSI 300 gauge, while telecom companies led gains. The Hang Seng Index climbed 0.4%. An intensifying campaign to reduce leverage in the financial system pushed the Shanghai benchmark to a 2.4% loss in the five days through Monday. This drove the gauge’s relative strength index to below 30, a level that suggests to some traders that an asset is oversold.

The nation’s banking regulator said Monday that lenders should carry out collateral pressure tests at least once a year, while the Securities Times reported that some rural banks had suspended interbank businesses temporarily while officials conduct spot checks. “Some stocks appeared to be very cheap at current levels, and this triggered some bargain hunting,” said Banny Lam, head of research at CEB in Hong Kong. State-owned enterprises that dominate old growth industries, such as banks and commodity producers, have been among the hardest-hit by the deleveraging drive, while new-economy shares remain in favor among overseas investors. That’s led to a wide gap between the nation’s two main offshore gauges: the Hang Seng China Enterprises Index and the MSCI China Index.

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Much collateral doesn’t actually exist. Wealth management products, shadow banks, it’s all not much more than a mirage. It takes faith.

How China Keeps Its Financial System From Collapsing (ZH)

With “risk” in most of the developed world seemingly a long forgotten four-letter word, as seen by today’s plunge in the VIX to a level not seen in 34 years, traders hoping for some “risk event” have been confined to the recent turmoil in China, where overnight not only did trade data disappoint, with both imports and exports missing, but bond yields jumped to the highest level since 2015, dragging stocks lower even as the local commodity crash slammed iron ore and copper to new YTD lows.

While largely a “controlled” tightening, meant to contain China’s out-of-control shadow banking system, the recent gyrations in Chinese capital markets are starting to have a profound impact on local funding, resulting in a collapse in new bond issuance, and according to FT calculations, in April the number of aborted issues rose to 154, up from 94 in March, 32 in February and 31 in January.

As DB added, “local bond markets are practically shut for corporates. In fact, YTD issuance is down 40%+ yoy and net issuance has been negative in three out of the first four months this year. A number of issuers are being forced to cancel bond issuances (over RMB100 billion YTD) and there were reports (Bloomberg) of even CDB halting issuance (though subsequently denied). Some AA corporates are now issuing at north of 7%.” These signs of mounting stress in China’s $9.3 trillion bond market come less than a month after the country’s banking regulator, Guo Shuqing, was quoted as supporting a campaign to sort out chaotic practices, and threatening to resign if the banking system became “a complete mess”.

[..] whether or not China keels over and has a hard (or worse) landing, will depend on the PBOC; when (not if) the central bank gets involved, will depend on how soon China’s banks and various CD-funded financial institutions run out of collateral (whether it exists or not) to sell, such as iron ore, copper, precious metals, bonds and even stocks. This will hardly come as a surprise. As we showed last month, the only reason the Chinese banking system hasn’t imploded, is due to nearly CNY 10 trillion in central bank liquidity support for the local banks, just under 100% of China’s GDP.

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Europe too.

Parts of Asia Will Grow Old Before Getting Rich, IMF Warns (BBG)

Asia’s rapidly aging population means the region is shifting from being the biggest contributor to the global workforce to subtracting hundreds of millions of people from it, according to the International Monetary Fund. The reversal of the so-called “demographic dividend” will drag on global growth and also that in Asia, the world’s fastest growing region, the IMF warned in its annual outlook for the area. The population growth rate will fall to zero for Asia by 2050 – it’s already negative in Japan – and the share of the population who are working-age has already hit its peak, the IMF estimates. That means the ratio of the population aged 65 and older will be almost two and a half times the current level by 2050, and even higher in East Asia.

“The speed of aging is especially remarkable compared to the historical experience in Europe and the United States,” the IMF said. Per capita income in Asia relative to the U.S. remains at much lower levels than those achieved by mature advanced economies in the past. “Countries in Asia will have less time to adapt policies to a more aged society than many advanced economies had,” the fund wrote. “As such, parts of Asia risk becoming old before becoming rich.” For economic growth, the aging process could erode up to one percentage point from annual output over the next three decades in Japan, and between 0.5-0.75 percentage point in China, Hong Kong, South Korea and Thailand.

While some bright spots remain, such as India and Indonesia, demographics could subtract 0.1 of a percentage point from annual global growth over the next three decades, the IMF estimates. It also means Asia is at risk of falling into secular stagnation if an older population leads to excessive savings and low investment renders monetary policy ineffective. The demographic shift will also likely keep downward pressure on real interest rates and asset returns for most major countries in Asia, the IMF said. “Adapting to aging could be especially challenging for Asia, as populations living at relatively low per capita income levels in many parts of the region are rapidly becoming old,” the IMF said.

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It’s time to come clean on how bad Italy is really doing.

Italy Adds Bum Note To Macron’s Ode To Euro Zone Joy (R.)

Italy is adding a bum note to Emmanuel Macron’s ode to joy. While it’s encouraging that a Europhile will take the French presidency after Sunday’s vote, attention can now turn to Europe’s other crisis-in-waiting. Elections are coming in Italy, and there are more of the ingredients for a populist shock than in France. The economy has fared much worse since the creation of the euro zone, with growth averaging zero since 2001, according to the IMF. GDP per capita has fallen in that time. The IMF expects the unemployment rate to reach 11.7% this year, 2 percentage points higher than in France. Anti-EU forces are also spread widely across Italy’s messy political landscape. Stagnation has fuelled support for the 5-Star Movement, which could lead Italy out of the euro zone and currently polls just below 30%.

Mainstream parties are shaky. The left fragmented after former prime minister Matteo Renzi lost his referendum on constitutional reform in December. The right is an awkward alliance between ageing former premier Silvio Berlusconi and more radical anti-EU parties, like the Lega Nord. The risk is that 5-Star forms a coalition with the Lega after elections that must take place by May next year. The economy is picking up, but tighter monetary policy, as the European Central Bank reins in bond buying, could strangle the recovery, as could an overly stern fiscal policy. Italy needs to cut spending or increase taxes by 2percentage points to meet European targets through 2019. Job losses from the restructuring of banks and bankrupt national airline Alitalia could become a lightning rod for anti-EU sentiment.

Europe can help. Italy is likely to miss its fiscal targets anyway, but loosening bloc-wide budget rules to encourage investment and spread out cuts over a long period would cement the recovery. A strong France, aided by Macron’s victory, might persuade Germany to spend more, and give other countries freer rein. However, even if a political shock is avoided, the next election may produce a weak government with no mandate for taking tough decisions to boost growth. Italy could be bringing discord to the region for years.

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MMT must go mainstream.

The Rock-Star Appeal of Modern Monetary Theory (Nation)

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.” The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

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No matter how deep you dig, you can’t guarantee safety for a million years. That’s what’s halted Yucca Mountain. The Bloomberg editors don’t understand the issue either.

To Bury Nuclear Waste, Dig Deeper Than Yucca Mountain (BBG)

Energy Secretary Rick Perry is right to say the U.S. needs a long-term solution to its massive nuclear waste problem. It also makes sense for Perry and some members of Congress to see Yucca Mountain as part of that solution – though many Nevadans promise to make sure it won’t be. But even if Yucca can survive the political fight, it can’t be the only option for disposing of America’s spent nuclear fuel. More than 75,000 metric tons of the stuff are cooling in pools and casks at dozens of power-plant sites around the country. That’s already too much to fit in Yucca Mountain, and the total grows by more than 2,000 tons a year. Other strategies are needed, ideally ones that are less politically radioactive. Consider, for instance, the idea of sinking the waste into boreholes that reach three miles below ground – 15 times as deep as the proposed chambers inside Yucca. Such shafts could be drilled in states that, unlike Nevada, benefit from the use of clean, reliable nuclear power.

Boring into the Earth’s deep rock layers could provide the kind of bury-it-and-forget-it underground disposal necessary for material that will remain dangerous for hundreds of millennia. Local opposition can still be expected; in North and South Dakota, residents have shouted down some plans to dig test holes. That’s why a so-called consent-based strategy, identifying locations with both the appropriate geology and an agreeable population, is necessary. If hosting a waste site means more funding for local public works and services, more communities might be willing to accept one. (This proved to be the case in Carlsbad, New Mexico, home to a storage place for low-level waste from nuclear weapons.) A familiarity with nuclear power may also encourage acceptance, perhaps because there is a nuclear plant in the area employing people and providing power.

The same approach could also be used to locate six or seven centers where waste from several nuclear plants could be stored while it awaits burial. Such containment facilities could also include research centers – mini national laboratories where scientists could work out new ways of reprocessing fuel and perhaps conduct demonstration projects for reactors designed to use safer fuels. The one thing the U.S. should not do is continue to neglect the growing quantities of nuclear waste. Over the past few decades, electricity ratepayers have contributed more than $34 billion to a national fund to pay for a geologic disposal site. And because none yet exists, taxpayers are forking over billions more to enable nuclear-plant operators to manage interim storage. The political barriers to solving this problem may be high, but further delay – and an undue fixation on Yucca Mountain – won’t make them any easier to overcome.

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Turkey will provoke Greece at some point, and US and Europe had better prevent that from happening.

Dangerous Times in the Aegean and Cyprus (K.)

The concept of gray zones (the claim that the sovereignty of a number of islands and islets in the Aegean is undetermined) was a novel idea that Turkey came up with 20 years ago. At some point, Ankara reached the point of including the Greek island of Gavdos in its gray zones list. Whenever Athens made an official request regarding the islands or rocky outcrops that Turkey had on its list, the answer was always very vague: “Anything that is not clearly included the bilateral agreements that set out Greece’s borders with other countries.” At first, many people thought this was a bargaining chip that Ankara would trade as part of a grand bargain. They were wrong. The failure to settle differences between Greece and Turkey gave Ankara the opportunity to add more issues to the agenda.

Over time, these have become permanent and ever-expanding. Currently, Turkey considers significant parts of the Aegean to be gray zones. This includes islands that have been inhabited for decades. It is questioning Greek sovereignty through its actions, not just its words, by the frequent presence of naval vessels in Greek waters and overflights by fighter jets. Over the last few months, it has being doing this more systematically and openly. Greece’s approach has also changed. The doctrine that existed in the wake of the Imia crisis in 1996, when the two countries almost went to war, was based around not building up tension following various incidents and maintaining a low profile.

[..] A dangerous situation is also playing out in Cyprus. The Turks are trying to impose the concept of gray zones there as well. July (when a new round of drilling for hydrocarbons is due to begin off Cyprus) promises to be a difficult month. Ankara will attempt before then to intimidate the companies that plan to start drilling or try to obstruct them if they are not scared off by threats.

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Prison camps are no solution.

New Refugee Center Planned On Chios As Tensions Simmer (K.)

The exact site for the creation of a new so-called pre-departure camp for migrants and refugees on the island of Chios will be determined by May 20, authorities said on Monday. The new camp will come as tensions at overcrowded reception centers on the eastern Aegean island continue to simmer, with almost daily clashes between stranded migrants of different ethnicities. “The experience of Lesvos and Kos where such centers have been created is positive,” said Lieutenant General Zacharoula Tsirigoti of the Greek Police in a press briefing Monday on Chios. Pre-departure centers are deemed essential as they house refugees and migrants returning to Turkey. Tsirigoti added that building a new center on the island is a “one-way street” as locals – many of whom have campaigned for the immediate removal of all migrants and refugees from Chios – say the situation has reached breaking point and that the large police force on the island has been unable to cope.

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The season is just starting: “..the trend points to around 250,000 people arriving over the course of 2017”. There is no place for these people in Italy and Greece.

Nearly 200 Missing, 11 Dead As Migrant Boats Sink Off Libya (AFP)

Eleven migrants have died and nearly 200 are missing after two boats sank off the coast of Libya, UN agencies said Monday citing survivors, in the latest such tragedy. The first involved an inflatable craft which left Libya early Friday with 132 people on board, only to start deflating a few hours later, before overturning. Some 50 survivors were picked up by a Danish container ship, the Alexander Maersk, which was alerted to divert by Italian coastguards and dropped them off on Sunday in Pozzallo, southern Sicily. Representatives of the UN High Commissioner for Refugees (UNHCR) and the International Organization for Migration (IOM) were able to meet them on Monday to hear their accounts. Survivors told them that women and children were among those missing.

At the same time, the bodies of 10 women and one child were found Monday on a beach in Zawiya, 50 kilometres (31 miles) west of Tripoli, according to an official for the Libyan Red Crescent. Then on Sunday seven migrants – a woman and six men – were rescued by Libyan fishermen and coastguards off the coast of the Libyan capital. An IOM spokesman who met them said they had set out on a boat with at least 120 people on board, including about 30 women and nine children. In all more than 6,000 migrants were rescued Friday and Saturday in international waters off the coast of Libya and brought to Italy, while several hundred were rescued in Libyan waters and taken back to Libya.

The number of people leaving Libya in the hope of starting a new life in Europe is up nearly 50% this year compared with the opening months of 2016. With most departures coming in the warm summer months, the trend points to around 250,000 people arriving over the course of 2017. Some 500,000 migrants were registered in Italy in the three years spanning 2014-16.

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Europe’s reputation is tarnished for decades. But everyone thinks they can deflect responsibility. Time for skin in the game.

Hundreds Of Migrants Feared Dead In Mediterranean Over Weekend (R.)

More than 200 migrants are feared to have died in the Mediterranean over the weekend, according to testimony from survivors, and several bodies, including that of an infant, have washed up on a Libyan beach. About 7,500 people have been rescued off the coast of Libya since Thursday, the Italian and Libyan coastguards said. Two groups of survivors told the organizations that hundreds drowned when their rubber boats began to deflate before rescuers arrived. More than 60 are feared dead and three bodies were recovered on Saturday, survivors brought to Sicily on Sunday told Italian coastguards. The boat left Libya carrying about 120, they said. There was some discrepancy in the numbers. Based on its interviews with some of the survivors in Pozzallo, Italy, the U.N. refugee agency estimated the number of dead at more than 80.

Separately, Libya’s coastguard picked up seven survivors over the weekend who said they had been on a boat packed with 170 migrants. Aid agency International Medical Corps, which gave medical care to the survivors, also confirmed their account. “We rescued on Sunday seven illegal migrants – six men and a woman,” said Omar Koko, a coastguard commander in the western city of Zawiya. “According to these survivors, there were 170 on board the boat, which sank because of overloading.” Among those missing were more than 30 women and nine children, Koko said. Eleven bodies washed up on the shore west of Zawiya, said Mohanad Krima, a spokesman for the Red Crescent in Zawiya. “All the bodies are of female victims and there is a girl of less than one year old,” he said.

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Oct 252016
 
 October 25, 2016  Posted by at 9:26 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle October 25 2016
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NPC Grief monument, Rock Creek cemetery, Washington DC 1915

The Eurozone Is Turning Into A Poverty Machine (Tel.)
Barclays Warns ‘Politics of Rage’ Will Slow Global Growth (BBG)
China Capital Outflows Highest Since Data Publishing Began In 2010 (BBG)
Credit Card Lending To US Subprime Borrowers Is Starting To Backfire (WSJ)
Bank of England Optimism Evaporates in Long-Term Debt (BBG)
The Deficit Is Too Small, Not Too Big (McCulley)
Welcome to the George Orwell Theme Park of Democracy (Jim Kunstler)
How Democrats Killed Their Populist Soul (Matt Stoller)
Hillary Clinton Is The Republican Party’s Last, Best Hope (Heat St.)
Clinton Ally Aided Campaign of FBI Official’s Wife (WSJ)
M5S Blasts Italian Constitutional Reform Proposed By PM Renzi (Amsa)
100 Million Canadians By 2100? Key Advisers Back Ambitious Goal (CP)
A 1912 News Article Ominously Forecasted Climate Change (Q.)
Refugee Camp On Lesbos Damaged In Riots As Rumors Fly (Kath.)
Ex-US Ambassador To Ukraine Geoffrey Pyatt Now Ambassador To Greece (Kath.)

 

 

Why does this truth have to come from the right wing press?

The Eurozone Is Turning Into A Poverty Machine (Tel.)

There are constant bank runs. The bond markets panic, and governments along its southern perimeter need bail-outs every few years. Unemployment has sky-rocketed and growth remains sluggish, no matter how many hundreds of billions of printed money the ECB throws at the economy. We are all tediously aware of how the euro-zone has been a financial disaster. But it is now starting to become clear that it is a social disaster as well. What often gets lost in the discussion of growth rates, bail-outs and banking harmonisation is that the eurozone is turning into a poverty machine. As its economy stagnates, millions of people are falling into genuine hardship. Whether it is measured on a relative or absolute basis, rates of poverty have soared across Europe, with the worst results found in the area covered by the single currency.

There could not be a more shocking indictment of the currency’s failure, or a more potent reminder that living standards will only improve once the euro is either radically reformed or taken apart. Eurostat, the statistical agency of the European Union, has published its latest findings on the numbers of people “at risk of poverty or social exclusion”, comparing 2008 and 2015. Across the 28 members, five countries saw really significant rises compared with the year of the financial crash. In Greece, 35.7pc of people now fall into that category, compared with 28.1pc back in 2008, a rise of 7.6 percentage points. Cyprus was up by 5.6 points, with 28.7pc of people now categorised as poor. Spain was up 4.8 points, Italy up 3.2 points and even Luxembourg, hardly known for being at risk of deprivation, up three points at 18.5pc.

It was not so bleak everywhere. In Poland, the poverty rate went down from 30.5pc to over 23pc. In Romania, Bulgaria, and Latvia, there were large falls compared to the 2008 figures – in Romania for example the percentage was down by seven points to 37pc. What was the difference between the countries where poverty went up dramatically, and those where it went down? You guessed it. The largest increases were all countries within the single currency. But the decreases were all in countries outside it. It gets worse. “At risk of poverty” is defined as living on less than 60pc of the national median income. But that median income has itself fallen over the last seven years, because most countries inside the eurozone have yet to recover from the crash. In Greece, the median income has dropped from €10,800 a year to €7,500 now.

[..] Why should Greece and Spain be doing so much worse than anywhere in Eastern Europe? Or why Italy should be doing so much worse than Britain, when the two countries were at broadly similar levels of wealth in the Nineties? (Indeed, the Italians actually overtook us for a while in GDP per capita.) Even a traditionally very successful economy such as the Netherlands, which has not been caught up in any kind of financial crisis, has seen big increases in both relative and absolute poverty. In fact, it is not very hard to work out what has happened. First, a dysfunctional currency system has choked off economic growth, driving unemployment up to previously unbelievable levels. After countries went bankrupt and had to be bailed out, the EU, along with the ECB and the IMF, imposed austerity packages that slashed welfare systems and cut pensions. It is not surprising poverty is increasing under those conditions.

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If you ask me, they’ve got it the wrong way around. If growth hadn’t slowed down, there’d be much less rage.

Barclays Warns ‘Politics of Rage’ Will Slow Global Growth (BBG)

Brexit, rising populism across Europe, the ascent of Donald Trump in America, and the backlash against income inequality everywhere. A slew of political and economic forces have nurtured a growing narrative that globalization is now on life support—a potential game-changer for global financial markets, which have staged a rapid expansion since the end of the Cold War thanks to unfettered cross-border flows. No more: Trade volumes have stalled while the “politics of rage” has taken root in advanced economies, driven by a collapse in the perceived legitimacy of political and economic institutions, a new report from Barclays warns.

The result, the bank says, is an oncoming protectionist lurch—restrictions on the free movement of goods, services, labor, and capital—combined with an erosion of support for supranational bodies, from the EU to the WTO. “Even mild de-globalization likely will slow the pace of trend global growth,” Marvin Barth, head of European FX strategy at Barclays, writes in the report. “A sense of economic and political disenfranchisement due to imperfect representation in national governments and delegation of sovereignty to supranational and intergovernmental organisations” has generated the backlash, he said. He cites as a major factor the collapse in support for centrist parties in advanced economies and adds that the role of income inequality may be overstated.

The report echoes Harvard University economist Dani Rodrik’s earlier contention that democracy, sovereignty, and globalization represent a “trilemma.” Expansion of cross-border trade links—and the attendant increase in the power of supranational authorities to adjudicate economic matters—is a direct threat to representative democracy, and vice-versa. The veto Monday of the EU’s free trade deal with Canada by the Belgian region of Wallonia—whose leader said the deadline to secure backing for the deal was “not compatible with the exercise of democratic rights”—is a sharp illustration of this trilemma.

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Breaking the dollar peg is a dangerous game, given the amount of debt denominated in USD. It can get expensive quite fast.

China Capital Outflows Highest Since Data Publishing Began In 2010 (BBG)

The offshore yuan traded near a record low as Chinese policy makers signaled they are willing to allow greater currency flexibility amid a slump in exports and an advance in the dollar. The exchange rate was at 6.7836 a dollar as of 1:01 p.m. in Hong Kong, after dropping to 6.7885, the weakest intraday level in data going back to 2010. In Shanghai, the currency was little changed at 6.7760, close to a six-year low and past the 6.75 year-end median forecast in a Bloomberg survey. The Chinese currency has come under increased pressure on signs that investors are taking more money out of the country. A gauge of the dollar rose to a seven-month high versus major currencies Monday as traders bet that the Federal Reserve may raise borrowing costs soon.

Unlike the yuan selloff earlier this year which sparked a global market rout, there’s no sense of panic yet as policy makers maintain a steady exchange rate against other currencies. “The central bank is tolerating more orderly depreciation of the yuan,” said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. “But it will step in to avoid market panic arising from a sharp yuan depreciation. The 6.8 level is critical in the near term.” [..] The onshore yuan has weakened 4.2% this year, the most in Asia. It has declined in all but two sessions this month as some analysts speculated that the central bank has reduced support following the yuan’s inclusion in the IMF’s basket of reserves on Oct. 1.

A net $44.7 billion worth of payments in the Chinese currency left the nation last month, according to data released by the State Administration of Foreign Exchange. That’s the most since the government started publishing the figures in 2010. [..] Chinese policy makers have downplayed the importance of the yuan-dollar exchange rate, saying they aim to keep the yuan steady against a broad basket of currencies. A Bloomberg gauge mimicking China Foreign Exchange Trade System’s yuan index against 13 major currencies has been little changed around 94 since August after falling more than 6 percent in the previous eight months.

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Imagine my surprise.

Credit Card Lending To US Subprime Borrowers Is Starting To Backfire (WSJ)

Credit-card lending to subprime borrowers is starting to backfire. Missed payments on credit cards that lenders issued recently are higher than on older cards, according to new data from credit bureau TransUnion. Nearly 3% of outstanding balances on credit cards issued in 2015 were at least 90 days behind on payments six months after they were originated. That compares with 2.2% for cards that were given out in 2014 and 1.5% for cards in 2013. The poorer performance on newer cards pushed up the 90-day or more delinquency rate for all credit cards to 1.53% on average nationwide in the third quarter. That’s the highest level since 2012.

The recent increase in subprime lending is one of the big contributors. Lenders ramped up subprime card lending in 2014 and have been doling out more of these cards recently. They issued just over 20 million credit cards to subprime borrowers in 2015, up some 20% from 2014 and up 56% from 2013, according to Equifax. Separately, missed payments in states with large oil or energy sectors continue to worsen. The share of card balances that were at least 90 days past due increased 12% in Oklahoma, 10% in Texas and 20% in Wyoming in the third quarter from a year prior, according to TransUnion.

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Really? They thought Carney could save the day?

Bank of England Optimism Evaporates in Long-Term Debt (BBG)

Long-term sterling bonds suggest investors are quickly losing confidence in the Bank of England’s ability to support debt markets through the U.K.’s departure from the EU. Holders have lost about 10% in as little as seven weeks on long-dated notes issued by Vodafone, British American Tobacco and WPP. The bond sales took place after the central bank announced plans in August to buy corporate debt, sparking investor optimism. The mood has since soured because of concerns about a so-called hard Brexit, sterling’s tumble and the outlook for inflation. “With the benefit of hindsight, August was the best time to issue,” said Srikanth Sankaran, head of European Credit and ABS strategy at Morgan Stanley. “The market was more focused on the Bank of England’s support rather than the longer-term Brexit risk.”

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McCulley used to be something big at PIMCO. He’s right, but it’s doubtful a change of course would be sufficient at this point. Austerity has killed a lot.

The Deficit Is Too Small, Not Too Big (McCulley)

[..] while Clinton gets my vote, her insistence at the final debate that her proposed fiscal program will not “add a penny” to the national debt is fouling my wonk serenity this morning. Every penny of new expenditure, she says, will be “paid for” with a new penny of tax revenue. Her deficit-neutral fiscal proposal is, I readily acknowledge, better than the status quo, as her proposed new spending would add 100 cents on the dollar to the nation’s aggregate demand, while her proposed tax increases would not subtract 100 cents on the dollar. Why? Because she proposes getting the new tax revenue from those with a low marginal propensity to spend, or alternatively, a high marginal propensity to save. To wit, from the not poor, including yes, the rich.

Thus, in simple Keynesian terms, there is some solace in her deficit-neutral fiscal package: It would be net stimulative to the economy, because it would – in technical terms – drive down the private sector’s savings rate. In less technical terms, it would take money from people who don’t live paycheck to paycheck, who would still spend the same, but just have less left over to save. And I have no problem with that. What sends me around the bend is the notion that the only way to boost aggregate demand is to drive down the private-sector savings rate, in the context of holding constant the public sector’s savings rate. But, you retort: The public sector, notably at the federal level, has a negative savings rate; it runs a deficit! Are you nuts?

No, I am not. Unless faced with an incipient inflation threat, born of an overheated economy, there is no reason whatsoever that the public sector should ever have a positive savings rate. What it should have is a positive, a bigly positive, investment rate. And in fact, a higher public investment rate and a lower public savings rate are exactly what our economy presently needs. Yes, a larger fiscal deficit. [..] investment drives aggregate demand, which begets aggregate production and thus, aggregate income, the fountain from which savings flow. Thus, if and when there is insufficient aggregate demand to foster full employment at a just income distribution, the underlying problem is a deficiency of investment, not savings. More investment is the solution, and investment is constrained not by a shortage of savings, but literally a deficiency of investment itself.

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“..the demonization of Russia – a way more idiotic exercise than the McCarthyite Cold War hysteria..”

Welcome to the George Orwell Theme Park of Democracy (Jim Kunstler)

If Trump loses, I will essay to guess that his followers’ next step will be some kind of violence. For the moment, pathetic as it is, Trump was their last best hope. I’m more comfortable about Hillary — though I won’t vote for her — because it will be salutary for the ruling establishment to unravel with her in charge of it. That way, the right people will be blamed for the mismanagement of our national affairs. This gang of elites needs to be circulated out of power the hard way, under the burden of their own obvious perfidy, with no one else to point their fingers at. Her election will sharpen awareness of the criminal conduct in our financial practices and the neglect of regulation that marked the eight years of Obama’s appointees at the Department of Justice and the SEC.

The “tell” in these late stages of the campaign has been the demonization of Russia – a way more idiotic exercise than the McCarthyite Cold War hysteria of the early 1950s, since there is no longer any ideological conflict between us and all the evidence indicates that the current state of bad relations is America’s fault, in particular our sponsorship of the state failure in Ukraine and our avid deployment of NATO forces in war games on Russia’s border. Hillary has had the full force of the foreign affairs establishment behind her in this war-drum-banging effort, yet they have not been able to produce any evidence, for instance, in their claim that Russia is behind the Wikileaks hack of Hillary’s email.

[..] The media has been on-board with all this. The New York Times especially has acted as the hired amplifier for the establishment lies – such a difference from the same newspaper’s role in the Vietnam War ruckus of yesteryear. Today (Monday) they ran an astounding editorial “explaining” the tactical necessity of Hillary’s dishonesty: “In politics, hypocrisy and doublespeak are tools,” The Times editorial board wrote. Oh, well, that’s reassuring. Welcome to the George Orwell Theme Park of Democracy.

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Absolute must read by Stoller, American history you didn’t know.

How Democrats Killed Their Populist Soul (Matt Stoller)

While not a household name today, Wright Patman was a legend in his time. His congressional career spanned 46 years, from 1929 to 1976. In that near-half-century of service, Patman would wage constant war against monopoly power. As a young man, at the height of the Depression, he challenged Herbert Hoover’s refusal to grant impoverished veterans’ accelerated war pensions. He successfully drove the immensely wealthy Treasury Secretary Andrew Mellon from office over the issue. Patman’s legislation to help veterans recoup their bonuses, the Bonus Bill—and the fight with Mellon over it—prompted a massive protest by World War I veterans in Washington, D.C., known as “the Bonus Army,” which helped shape the politics of the Depression.

In 1936, he authored the Robinson-Patman Act, a pricing and antitrust law that prohibited price discrimination and manipulation, and that finally constrained the A&P chain store—the Walmart of its day—from gobbling up the retail industry. He would go on to write the Bank Secrecy Act, which stops money-laundering; defend Glass-Steagall, which separates banks from securities dealers; write the Employment Act of 1946, which created the Council of Economic Advisors; and initiate the first investigation into the Nixon administration over Watergate.

Far from the longwinded octogenarian the Watergate Babies saw, Patman’s career reads as downright passionate, often marked by a vitality you might see today in an Elizabeth Warren—as when, for example, he asked Fed Chairman Arthur Burns, “Can you give me any reason why you should not be in the penitentiary?” Despite his lack of education, Patman had a savvy political and legal mind. In the late 1930s, the Federal Reserve Board refused to admit it was a government institution. So Patman convinced the District of Columbia’s government to threaten foreclosure of all Federal Reserve Board property; the Board quickly produced evidence that it was indeed part of the federal government.

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Kind of like a second chapter to Stoller’s piece above.

Hillary Clinton Is The Republican Party’s Last, Best Hope (Heat St.)

While Trump has pushed a populist, anti-free trade message, Hillary champions the large multinational corporations that create jobs for everyday Americans. As secretary of state, she worked tirelessly to advance the Trans-Pacific Partnership, the “gold standard” of trade agreements. As a candidate, she expertly silenced the gullible radicals supporting Bernie Sanders by pretending she won’t sign TPP into law as president. (She will.) Hillary’s disdain for left-wing agitators does not end there. She has also gone to bat for the heroes in America’s fracking industry, telling environmentalists to “get a life” in emails uncovered by Wikileaks. [..]

One of the greatest sources of frustration for Republicans during the Obama presidency has been his weak-sauce, isolationist foreign policy. In the absence of strong American leadership, the world has plunged into chaos. Trump shares Obama’s ideology of avoiding foreign entanglements, even going so far as to question the need for NATO as Putin runs amok unchecked. It is precisely at this moment that America needs the hawkish leadership of Hillary Clinton to defend American exceptionalism and reassert our hegemony on the world stage. Among her fellow neoconservative war hawks, Hillary is admired for her sterling record on foreign policy — from supporting the invasion of Iraq in 2002 to her valiant efforts as secretary of state to persuade Obama to stop being such a pushover on the world stage.

During the Arab Spring in 2011, Hillary impressed upon Obama the need for a U.S.-led “coalition of the willing” to help mold the future of the Middle East in the name of freedom. Muammar Gaddafi wound up dead in a ditch. Later, when the president sought input on Syria, Hillary recommended force and arming rebel groups. Obama’s failure to follow her advice led to the current migrant crisis and ongoing tragedy in Syria. Bashar al-Assad is still alive and well. Imagine our enemies cowering in the shade as President Hillary’s massive drone armada blocks out the sun en route to visit death upon the enemies of freedom. Slay Queen, indeed. Voters looking for a reliable pro-business, conservative hawk to undo eight years of Obama’s feckless progressivism and combat the cancer of Trumpism need look no further than Hillary Rodham Clinton. She is the GOP’s last, best hope.

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Incredible. Just incredible.

Clinton Ally Aided Campaign of FBI Official’s Wife (WSJ)

The political organization of Virginia Gov. Terry McAuliffe, an influential Democrat with longstanding ties to Bill and Hillary Clinton, gave nearly $500,000 to the election campaign of the wife of an official at the FBI who later helped oversee the investigation into Mrs. Clinton’s email use. Campaign finance records show Mr. McAuliffe’s political-action committee donated $467,500 to the 2015 state Senate campaign of Dr. Jill McCabe, who is married to Andrew McCabe, now the deputy director of the FBI. The Virginia Democratic Party, over which Mr. McAuliffe exerts considerable control, donated an additional $207,788 worth of support to Dr. McCabe’s campaign in the form of mailers, according to the records.

That adds up to slightly more than $675,000 to her candidacy from entities either directly under Mr. McAuliffe’s control or strongly influenced by him. The figure represents more than a third of all the campaign funds Dr. McCabe raised in the effort. Mr. McAuliffe and other state party leaders recruited Dr. McCabe to run, according to party officials. She lost the election to incumbent Republican Dick Black. [..] Dr. McCabe announced her candidacy in March 2015, the same month it was revealed that Mrs. Clinton had used a private server as secretary of state to send and receive government emails, a disclosure that prompted the FBI investigation. At the time the investigation was launched in July 2015, Mr. McCabe was running the FBI’s Washington, D.C., field office, which provided personnel and resources to the Clinton email probe.

That investigation examined whether Mrs. Clinton’s use of private email may have compromised national security by transmitting classified information in an insecure system. [..] At the end of July 2015, Mr. McCabe was promoted to FBI headquarters and assumed the No. 3 position at the agency. In February 2016, he became FBI Director James Comey’s second-in-command. As deputy director, Mr. McCabe was part of the executive leadership team overseeing the Clinton email investigation, though FBI officials say any final decisions on that probe were made by Mr. Comey, who served as a high-ranking Justice Department official in the administration of George W. Bush.

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“Di Maio was also ironic about the endorsement of the reform received by Renzi from President Obama during a recent visit to Washington. “Let’s say it is not the first time Obama has intervened concerning a referendum in another country, he supported ‘Remain’ in England and ‘Brexit’ won. Now he is backing the Yes vote and so the No front should be reassured..”

M5S Blasts Italian Constitutional Reform Proposed By PM Renzi (Amsa)

The anti-establishment Five Star Movement (M5S) will vote No in the December 4 referendum on Constitutional reform because the law “deprives us of democratic rights”, party bigwig and Deputy House Speaker Luigi Di Maio said on Monday. “In our opinion, the title of the law does not in any way reflect its content, in the same way that the title of the Good School law does not in any way reflect the content of that reform,” Di Maio told radio broadcaster Rtl 102.5. The M5S recently lost a legal challenge against the question in the consultative referendum, which echoes the wording of the title of the constitutional law, arguing it amounts to a “deceptive” advertisement for the government’s position in favour of a Yes vote.

On December 4, Italians will be called to answer ‘yes’ or ‘no’ on a question that reads: “Do you approve a constitutional law that concerns the scrapping of the bicameral system (of parliament), reducing the number of MPs, limiting the operating costs of public institutions, abolishing the National Council on Economy and Labour (CNEL), and amending Title V of the Constitution, Part II?”. The reform approved by parliament in April would turn the Senate into a leaner body of indirectly elected regional and local representatives with limited lawmaking powers. Critics of the reform, including M5S and a left-wing faction within Premier Matteo Renzi’s own Democratic Party (PD), say it will actually make procedures more complicated.

Di Maio was also ironic about the endorsement of the reform received by Renzi from US President Barack Obama during a recent visit to Washington. “Let’s say it is not the first time Obama has intervened concerning a referendum in another country, he supported ‘Remain’ in England and ‘Brexit’ won. Now he is backing the Yes vote and so the No front should be reassured,” he said.

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There is a reason why Canada is sparsely populated. Let’s not tell them. Don’t spoil the fun.

100 Million Canadians By 2100? Key Advisers Back Ambitious Goal (CP)

Imagine Canada with a population of 100 million — roughly triple its current size. For two of the most prominent voices inside the Trudeau government’s influential council of economic advisers, it’s much more than a passing fancy. It’s a target. The 14-member council was assembled by Finance Minister Bill Morneau to provide “bold” advice on how best to guide Canada’s struggling economy out of its slow-growth rut. One of their first recommendations, released last week, called for a gradual increase in permanent immigration to 450,000 people a year by 2021 — with a focus on top business talent and international students. That would be a 50% hike from the current level of about 300,000.

The council members — along with many others, including Economic Development Minister Navdeep Bains — argue that opening Canada’s doors to more newcomers is a crucial ingredient for expanding growth in the future. They say it’s particularly important as more and more of the country’s baby boomers enter their golden years, which eats away at the workforce. The conviction to bring in more immigrants is especially significant for at least two of the people around the advisory team’s table. Growth council chair Dominic Barton, the powerful global managing director of consulting firm McKinsey, and Mark Wiseman, a senior managing director for investment management giant BlackRock, are among the founders of a group dedicated to seeing the country responsibly expand its population as a way to help drive its economic potential.

The Century Initiative, a five-year-old effort by well-known Canadians, is focused on seeing the country of 36 million grow to 100 million by 2100. Without significant policy changes on immigration, the current demographic trajectory has Canada’s population on track to reach 53 million people by the end of the century, the group says on its website. That would place it outside the top 45 nations in population size, it says.

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It goes back quite a bit further.

A 1912 News Article Ominously Forecasted Climate Change (Q.)


Published Aug. 14, 1912. (The Rodney and Otamatea Times and Waitemata and Kaipara Gazette)

A short news clip from a New Zealand paper published in 1912 has gone viral as an example of an early news story to make the connection between burning fossil fuels and climate change. It wasn’t, however, the first article to suggest that our love for coal was wreaking destruction on our environment that would lead to climate change. The theory—now widely accepted as scientific reality—was mentioned in the news media as early as 1883, and was discussed in scientific circles much earlier than that. The French physicist Joseph Fourier had made the observation in 1824 that the composition of the atmosphere is likely to affect the climate. But Svante Arrhenius’s 1896 study titled, “On the influence of carbonic acid in the air upon the temperature on the ground” was the first to quantify how carbon dioxide (or anhydrous carbonic acid, by another name) affects global temperature.

Though the study does not explicitly say that the burning of fossil fuels would cause global warming, there were scientists before him who had made such a forecast. The earliest such mention that Quartz could find was in the journal Nature in December of 1882. The author HA Phillips writes: “According to Prof Tyndall’s research, hydrogen, marsh gas, and ethylene have the property to a very high degree of absorbing and radiating heat, and so much that a very small proportion, of say one thousandth part, had very great effect. From this we may conclude that the increasing pollution of the atmosphere will have a marked influence on the climate of the world.” Phillips was relying on the work of John Tyndall, who in the 1860s had shown how various gases in the atmosphere absorb heat from the sun in the form of infrared radiation.

Now we know that Phillips was wrong about a few scientific details: He ignored carbon dioxide from burning coal and focused more on the by-products of mining. Still, he was drawing the right conclusion about what our demand for fossil fuels might do to the climate. Newspapers around the world took those words published in a prestigious scientific journal quite seriously. In January 1883, the New York Times published a lengthy article based on Phillips’ letter to Nature, which said: “The writer who has partially discussed the subject in the columns of Nature has fixed upon 1900 as the date when the earth’s atmosphere will become entirely irrespirable. This is probably a misprint, for unless the consumption of cigarettes increases unlooked-for rapidly the atmosphere ought to remain respirable until 1910, or even 1912. At the latter date all mankind will have perished, and nothing except the hardier plants will be living on the surface of the earth.”

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The EU is a failure of historical proportions economically, politically and above all morally.

Refugee Camp On Lesbos Damaged In Riots As Rumors Fly (Kath.)

Migrants on Monday attacked the premises of the European Asylum Support Office (EASO) inside the Moria hot spot on the eastern Aegean island of Lesvos, completely destroying four container office units and damaging another two during a protest that was contained by riot police. Officials said the protesters, most of them men from Pakistan, threw rocks and burning blankets at the EASO facilities, allegedly frustrated at delays in processing their asylum applications. Riot police were called in to contain the riot. The blaze was put out by the fire service before it could cause further damage. There were no reports of injuries.

The violence at Moria prompted authorities on other migrant-hosting islands, including Chios, Samos, Kos and Leros, to beef up their security measures. Speaking on condition of anonymity, a local government official told Kathimerini that migrant riots were often triggered by rumors. “Refugees and migrants are told that if their facilities are destroyed they will have nowhere to stay and so they will be transferred to the mainland,” the source said.

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Victoria Nuland’s neocon and Kiev coup instigator buddy. Bad news for Greece. Wonder what the pressure on Tsipras has been.

Ex-US Ambassador To Ukraine Geoffrey Pyatt Now Ambassador To Greece (Kath.)

The official welcome ceremony for new US Ambassador to Greece Geoffrey R. Pyatt took place on the US 6th Fleet command and control ship USS Mount Whitney, in the port of Piraeus south of Athens, Monday. Earlier in the day, Pyatt presented Greek President Prokopis Pavlopoulos with his diplomatic credentials at the Presidential Mansion. The ceremony was attended by Foreign Minister Nikos Kotzias. Nominated by President Obama, Pyatt is widely regarded as an experienced diplomat. He previously served as US ambassador in Kiev and had to deal with the fallout of the Ukrainian crisis. His appointment comes at a key time for both Athens and Washington. Recent developments in the wider region have created challenges as well as opportunities for the two NATO allies. Obama is expected to visit Athens in November. Political and military officials have been exchanging visits ahead of the trip.

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Oct 042016
 
 October 4, 2016  Posted by at 9:36 am Finance Tagged with: , , , , , , , , ,  3 Responses »
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Howard Hollem Assembly and Repairs Department Naval Air Base, Corpus Christi 1942

‘I Defy Any Analyst To Tell Me What Deutsche’s Derivatives Are Worth’ (Price)
IMF and ECB Don’t Even See Their Destruction of Greece as a Failure (M. Hudson)
The New Confessions of an Economic Hit Man (Yes!)
Median S&P 500 Stock Is More Overvalued Than At Any Point In History (Hussman)
TARGET2 Shows Europe’s Banking Crisis Is Escalating Again – Fast (Gerifa)
US Stock Buyback Plans Drop To 5 Year Low (ZH)
Subprime Auto-Loan Backed Securities Turn Toxic (WS)
Putin Suspends Plutonium Cleanup Accord With US Citing ‘Unfriendly’ Acts (R.)
Predictable Presidential Temperament (Scott Adams)
When It Comes to Tax Avoidance, Donald Trump’s Just a Small Fry (NYT)
ING Announces 7,000 Job Cuts As Unions Condemn ‘Horror Show’ (G.)
Why Biologists Don’t Believe In Race (BBG)
Bid For Strongest Protection For All African Elephants Defeated At Summit (G.)
EU Signs Deal To Deport Unlimited Numbers Of Afghan Asylum Seekers (G.)
Over 6,000 Migrants Rescued From Mediterranean In A Single Day, 22 Dead (R.)

 

 

Mark-to-Myth.

‘I Defy Any Analyst To Tell Me What Deutsche’s Derivatives Are Worth’ (Price)

This is getting to be a habit. Previous late summer holidays by this correspondent coincided with the run on Northern Rock, and subsequently with the failure of Lehman Brothers. So the final crawl towards the probable nationalisation of Deutsche Bank came as no particular surprise this year, but it is tiresome to relate nevertheless. The 2015 annual report for Deutsche Bank runs to some 448 pages, so one rather doubts if even its CEO, John Cryan, has read it all, or has a complete grasp of, for example, its €42 trillion in total notional derivatives exposure.

Is Deutsche Bank technically insolvent? We’d suggest that it probably is, but we have no dog in the fight, having never either owned banks, or shorted them. And like everybody else we assume that some kind of fix will soon be in – probably one that will further vindicate exposure to gold, both as money substitute and currency substitute. Professor Kevin Dowd, asking whether Deutsche Bank ist kaputt, suggests that the bank’s derivatives exposure is difficult to assess rationally; the value of its derivatives book:

“is unreliable because many of its derivatives are valued using unreliable methods. Like many banks, Deutsche uses a three-level hierarchy to report the fair values of its assets. The most reliable, Level 1, applies to traded assets and fair-values them at their market prices. Level 2 assets (such as mortgage-backed securities) are not traded on open markets and are fair-valued using models calibrated to observable inputs such as other market prices. The murkiest, Level 3, applies to the most esoteric instruments (such as the more complex/illiquid Credit Default Swaps and Collateralized Debt Obligations) that are fair-valued using models not calibrated to market data – in practice, mark-to-myth. The scope for error and abuse is too obvious to need spelling out.”

[As Compass Point’s Charles Peabody exclaims “I defy any analyst to tell me what that {derivative} portfolio is worth.”]

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Michael Hudson reviews Galbraith’s latest book. Europe’s Economic Hit Men.

IMF and ECB Don’t Even See Their Destruction of Greece as a Failure (M. Hudson)

[..] instead of an emerging “European superstate” run by elected representatives empowered to promote economic recovery and growth by writing down debts in order to revive employment, the Eurozone is being run by the troika on behalf of bondholders and banks. ECB and EU technocrats are serving these creditor interests, not those of the increasingly indebted population, business and governments. The only real integration has been financial, empowering the ECB to override national sovereignty to dictate public spending and tax policy. And what they dictate is austerity and economic shrinkage. In addition to a writeoff of bad debts, an expansionary fiscal policy is needed to save the eurozone from becoming a dead zone.

But the EU has no unified tax policy, and money creation to finance deficit spending is blocked by lack of a central bank to monetize government deficits under control of elected officials. Europe’s central bank does not finance deficit spending to revive employment and economic growth. “Europe has devoted enormous effort to create a ‘single market’ without enlarging any state, and while pretending that the Central Bank cannot provide new money to the system.” Without monetizing deficits, budgets must be cut and the public domain sold off, with banks and bondholders in charge of resource allocation. As long as “the market” means keeping the high debt overhead in place, the economy will be sacrificed to creditors. Their debt claims will dominate the market and, under EU and ECB rules, will also dominate the state instead of the state controlling the financial system or even tax policy.

Galbraith calls this financial warfare totalitarian, and writes that while its philosophical father is Frederick Hayek, the political forbear of this market Bolshevism is Stalin. The result is a crisis that “will continue, until Europe changes its mind. It will continue until the forces that built the welfare state in the first place rise up to defend it.” To prevent such a progressive policy revival, the troika promotes regime change in recalcitrant economies, such as it deemed Syriza to be for trying to resist creditor commitments to austerity. Crushing Greece’s Syriza coalition was openly discussed throughout Europe as a dress rehearsal for blocking the Left from supporting its arguments. “Governments from the Left, no matter how free from corruption, no matter how pro-European,” Galbraith concludes, “are not acceptable to the community of creditors and institutions that make up the European system.”

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“..it is not an American empire, it’s not helping Americans. It’s exploiting us in the same way that we used to exploit all these other countries around the world.”

The New Confessions of an Economic Hit Man (Yes!)

Sarah van Gelder : What’s changed in our world since you wrote the first Confessions of an Economic Hit Man?

John Perkins : Things have just gotten so much worse in the last 12 years since the first Confessions was written. Economic hit men and jackals have expanded tremendously, including the United States and Europe. Back in my day we were pretty much limited to what we called the third world, or economically developing countries, but now it’s everywhere. And in fact, the cancer of the corporate empire has metastasized into what I would call a failed global death economy. This is an economy that’s based on destroying the very resources upon which it depends, and upon the military. It’s become totally global, and it’s a failure.

van Gelder : So how has this switched from us being the beneficiaries of this hit-man economy, perhaps in the past, to us now being more of the victims of it?

Perkins : It’s been interesting because, in the past, the economic hit man economy was being propagated in order to make America wealthier and presumably to make people here better off, but as this whole process has expanded in the U.S. and Europe, what we’ve seen is a tremendous growth in the very wealthy at the expense of everybody else. On a global basis we now know that 62 individuals have as many assets as half the world’s population. We of course in the U.S. have seen how our government is frozen, it’s just not working. It’s controlled by the big corporations and they’ve really taken over. They’ve understood that the new market, the new resource, is the U.S. and Europe, and the incredibly awful things that have happened to Greece and Ireland and Iceland, are now happening here in the U.S. We’re seeing this situation where we can have what statistically shows economic growth, and at the same time increased foreclosures on homes and unemployment.

van Gelder : Is this the same kind of dynamic about debt that leads to emergency managers who then turn over the reins of the economy to private enterprises? The same thing that you are seeing in third-world countries?

Perkins : Yes, when I was an economic hit man, one of the things that we did, we raised these huge loans for these countries, but the money never actually went to the countries, it went to our own corporations to build infrastructure in those countries. And when the countries could not pay off their debt, we insisted that they privatize their water systems, their sewage systems, their electric systems. Now we’re seeing that same thing happen in the United States. Flint, Michigan, is a very good example of that. This is not a U.S. empire, it’s a corporate empire protected and supported by the U.S. military and the CIA. But it is not an American empire, it’s not helping Americans. It’s exploiting us in the same way that we used to exploit all these other countries around the world.

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“..easily exceeding the overvaluation observed at the 2000 and 2007 pre-crash extremes.”

Median S&P 500 Stock Is More Overvalued Than At Any Point In History (Hussman)

“In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit.” – Chicago Tribune, April 1890

[..] I’ve noted before that while the bubble peak in 2000 was the most extreme level of valuation in history on a capitalization-weighted basis, the recent speculative episode has actually exceeded that bubble from the standpoint of speculation in individual stocks. The most reliable measures of individual stock valuation we’ve found are based on formal discounted cash flow considerations, but among publicly-available measures we’ve evaluated, price/revenue ratios are better correlated with actual subsequent returns than price/earnings ratios (though normalized profit margins and other factors are obviously necessary to make cross-sectional comparisons).

The chart below shows the median price/revenue ratio across all S&P 500 components, in data since 1986. I should note that from a long-term perspective, the valuation levels we observed in 1986 are actually close to very long-term historical norms over the past century, as the pre-bubble norm for the market price/revenue ratio is just 0.8 in data since 1940. With the exception of 1986, and the 1987, 1990 and 2009 lows, which were moderately but not severely below longer-term historical norms, every point in this chart is “above average” from the standpoint the longer historical record. Presently, the median stock in the S&P 500 is more overvalued than at any point in U.S. history, easily exceeding the overvaluation observed at the 2000 and 2007 pre-crash extremes.

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Unstoppable. There’s not enough fingers for al the holes in the dikes.

TARGET2 Shows Europe’s Banking Crisis Is Escalating Again – Fast (Gerifa)

Problems of Deutsche Bank, Commerzbank, Monte dei Paschi and other German, Italian and Spanish banks are not the only concern of the European Banking System. Trouble is much deeper than it is thought because there is a systemic imbalance that has been increasing for almost ten years. Politicians do not want to tell us the truth, but soon we will experience the same crisis in the Monetary Union as we did in 2012. The extent of the problems in the European Banking System is TARGET2 and its balances of the National Central Banks of the Eurosystem. These balances, or rather imbalances, reflect the direction of the capital flight. And there is only one way: from Southern Europe into Germany. After Draghi’s famous words “I do whatever it takes to save the euro”, things seemed to improve; however, since January 2015 problems have been escalating again.


TARGET2, (i.e. Trans-European Automated Real-Time Gross Settlement Express Transfer System), is a clearing system which allows commercial banks in Europe to conduct payment transactions in the euro through National Central Banks (NCB) and the European Central Bank (ECB).

The excess money flow from banks in one country to banks in another country has to be compensated for. It can be done with loans or so called interbank lending. If there is no compensation from the interbank market (because banks do not trust each other any more) then country A has a liability and country B has a claim and compensation comes from the ECB. Therefore TARGET2 balances are net claims and liabilities of the euro area NCBs vis-a-vis the ECB. As long as the interbank money market in Europe functioned correctly, balances were relatively stable. Excess money that flows from Greece to Germany was compensated for with the purchase of Greek bonds or by interbank lending. However, after the crisis in the Euro Area, banks have stopped lending each other money and the compensation has to be provided by the central bank.

As the Euro Crisis Monitor shows, on the basis of the ECB data, the money is going now to Germany and also to Luxembourg, the Netherlands and Finland, while all other national banks have increasing liabilities! The worst situation is in Spain and Italy who are now close to the 2012 negative records. The current imbalance, or the excessive flow of money from Southern Europe to Northern Europe is not related to the trade balance deficit. Spain and Italy have managed to reduce their trade balance deficits. We hope clients from Banca Monte dei Paschi di Siena have not moved their money to Deutsche Bank. The Greek balance seems to be improving, but it is due to capital control: banks in Greece are limited in using the system.

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The only game is leaving town.

US Stock Buyback Plans Drop To 5 Year Low (ZH)

The value of stock buyback announcements from U.S. companies slowed to its lowest level in nearly five years, dropping to a fresh nine quarter low, TrimTabs Investment Research said on Monday, potentially jeopardizing one of the main drivers of the rising stock market. TrimTabs calculated that buybacks rebounded to $59.9 billion in September from a 3.5 year low of $21.5 billion in August, but two-thirds of last month’s volume was due to a single buyback by Microsoft. The 39 buybacks rolled out last month was the lowest number in a month since January 2011. “Buybacks have been trending lower for the past two years, which is a cautionary longer-term signal for U.S. equities,” said Winston Chua, analyst at TrimTabs. “Along with central bank asset purchases, buybacks have been a key pillar of support for the bull market.”

Somewhat surprisingly, the decline in buybacks takes place even as corporations issue record amounts of debt which in previous years was largely put toward stock repurchases but is increasingly going to fund maturing debt due to a rising rollover cliff in the coming year. “The U.S. stock market isn’t likely to get as much of a boost from buybacks as it did in recent years,” noted Chua. “Apart from big tech firms and the too-big-to-fails, fewer companies seem willing to use lots of cash to support share prices. One month ago, David Santschi, CEO of TrimTabs, warned that “buyback activity has been disappointing in earnings season”, a trend that has persisted in the coming weeks. “The reluctance to pull the trigger on share repurchases suggests corporate leaders are becoming less enthusiastic about what they see ahead.”

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As car sales are already under threat.

Subprime Auto-Loan Backed Securities Turn Toxic (WS)

In the subprime auto loan market, things are turning ugly as delinquencies and losses have begun soaring. Specialized lenders – a couple of big ones, and a whole slew of small ones that service the lower end of the subprime market – slice and dice these loans, repackage them into auto-loan backed securities (auto ABS), and sell them to investors, such as yield-hungry pension funds. Delinquencies of 60 days and higher among subprime auto ABS increased by 22% year-over-year in August, Fitch Ratings reported on Friday – now amounting to 4.9% of the outstanding balances that Fitch tracks and rates. And subprime annualized losses increased by 27% year-over-year, reaching 8.9% of the outstanding balances of auto ABS.

Even delinquencies among prime borrowers are rising, with delinquencies of 60 days or more increasing by 17% from a year ago, and annualized losses by 11%, though they’re still relatively tame at 0.4% and 0.6% respectively of the balances outstanding. And according to Fitch, the toxicity level in the subprime auto ABS space isgoing to rise, with “subprime auto losses to pierce 10% by year-end.” Total auto loan balances, both subprime and prime – given the soaring prices of cars, the stretched terms of the loans, and the ballooning loan-to-value ratios – have been skyrocketing, up 46% from the first quarter in 2011 through the second quarter in 2016, when they hit $1.07 trillion:

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“..taking into account this tension (in relations) in general … the Russian side considers it impossible for the current state of things to last any longer.”

Putin Suspends Plutonium Cleanup Accord With US Citing ‘Unfriendly’ Acts (R.)

Russian President Vladimir Putin on Monday suspended an agreement with the United States for disposal of weapons-grade plutonium because of “unfriendly” acts by Washington, the Kremlin said. A Kremlin spokesman said Putin had signed a decree suspending the 2010 agreement under which each side committed to destroy tonnes of weapons-grade material because Washington had not been implementing it and because of current tensions in relations. The two former Cold War adversaries are at loggerheads over a raft of issues including Ukraine, where Russia annexed Crimea in 2014 and supports pro-Moscow separatists, and the conflict in Syria.

The deal, signed in 2000 but which did not come into force until 2010, was being suspended due to “the emergence of a threat to strategic stability and as a result of unfriendly actions by the United States of America towards the Russian Federation”, the preamble to the decree said. It also said that Washington had failed “to ensure the implementation of its obligations to utilize surplus weapons-grade plutonium”. The 2010 agreement, signed by Russian Foreign Minister Sergei Lavrov and then-U.S. Secretary of State Hillary Clinton, called on each side to dispose of 34 tonnes of plutonium by burning in nuclear reactors. Clinton said at the time that that was enough material to make almost 17,000 nuclear weapons.

Both sides then viewed the deal as a sign of increased cooperation between the two former adversaries toward a joint goal of nuclear non-proliferation. “For quite a long time, Russia had been implementing it (the agreement) unilaterally,” Kremlin spokesman Dmitry Peskov told a conference call with journalists on Monday. “Now, taking into account this tension (in relations) in general … the Russian side considers it impossible for the current state of things to last any longer.”

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Dilbert creator Scott Adams was apparently “shadowbanned” by Twitter in the aftermath of this post for asking his followers for examples of Clinton supporters being violent against peaceful Trump supports in public.

Predictable Presidential Temperament (Scott Adams)

Do you remember the time someone insulted Donald Trump and then Trump punched him in the nose? Neither do I. Because nothing like that has ever happened. Instead, people attack Donald Trump with words (often) and he attacks them back with words. See if the following pattern looks familiar: 1. Person A insults Trump with words. Trump insults back with words. 2. Person B mentions some sort of scandal about Trump. Trump mentions some sort of scandal about Person B. 3. Person C endorses Trump (even if they publicly feuded before) and Trump immediately says something nice about Person C. The feud is instantly over. See the pattern? Consider how many times you have seen the pattern repeat with Trump. It seems endless. And consistent.

Trump replies to critics with proportional force. His reaction is as predictable as night following day. The exceptions are his jokey comments about roughing up protesters at his rallies. The rally-goers recognize it as entertainment. I won’t defend his jokes at rallies except to say that it isn’t a temperament problem when you say something as a joke and people recognize it as such. (We see his rally joke-comments out of context on news coverage so they look worse.) What we have in Trump is the world’s most consistent pattern of behavior. For starters, he only responds to the professional critics, such as the media and other politicians. When Trump responded to the Khan family and to Miss Universe’s attacks, they had entered the political arena.

As far as I know, private citizens – even those critical of Trump – have never experienced a personal counter-attack. Trump limits his attacks to the folks in the cage fight with him. And when Trump counter-attacks, he always responds with equal measure. Words are met with words and scandal mentions are met with scandal mentions. (And maybe a few words.) But always proportionate and immediate. Does any of that sound dangerous? What if Trump acted this way to our allies and our adversaries? What then? Answer: Nothing Our allies won’t insult Trump, and they won’t publicly mention any his alleged scandals. They will respect the office of the President of the United States no matter what they think of Trump.

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“Avoidance” is already a leading, and therefore unfortunate, term.

When It Comes to Tax Avoidance, Donald Trump’s Just a Small Fry (NYT)

Not paying taxes “makes me smart,” Donald J. Trump said last week. His surrogates called him “a genius” for his recently revealed tax avoidance strategies. Well, if they are right, the executives running corporate America are absolute virtuosos. An exhaustive study being released on Tuesday by a group of researchers shows in detail how Fortune 500 companies have managed to shelter trillions of dollars in profits offshore from being taxed. Mr. Trump’s efforts pale by comparison. Worse, the companies have managed to hide many of their tax havens completely, in many cases reporting different numbers to different government agencies to obfuscate exactly how they’ve avoided Uncle Sam. And, yes, it is all legal.

The immediate response from many readers may be ire for the companies avoiding taxes — or for Mr. Trump. But that’s not the goal of this particular column. In this case, that kind of thinking may even be counterproductive. Instead, the study — which notes that 58 Fortune 500 companies would owe $212 billion in additional federal taxes, “equal to the entire state budgets of California, Virginia and Indiana combined,” if they were taxed properly — should be a five-alarm call to voters and lawmakers to finally fix the tax system. If all the attention on Mr. Trump’s tax bill (or lack of one) isn’t enough to inspire a complete rewrite of the tax code, this study may be. The authors of the report, which include the U.S. PIRG Education Fund and Citizens for Tax Justice, combed through the filings of the Fortune 500 for 2015 and found an astonishing 73% “maintained subsidiaries in offshore tax havens.”

Maybe it is to be expected. Companies and individuals complain bitterly that taxes are too high and the rules too complicated, but many corporations and the wealthiest members of our society have found ways to make the tax code work for them. If all the Fortune 500 companies paid taxes on their sheltered profits, the researchers tallied, the government would receive a whopping $717.8 billion windfall. To put that number in context, the 2015 federal budget deficit was $438 billion. However, fixing our corporate tax system alone isn’t the answer to reducing our red ink; it might only be a drop in the bucket given that our total federal debt is nearing $20 trillion.

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Government bails out bank with taxpayers money, which then goes and fires taxpayers. What’s wrong with this picture?

ING Announces 7,000 Job Cuts As Unions Condemn ‘Horror Show’ (G.)

ING’s plans to shed 7,000 jobs and invest in its digital platforms to make annual savings of €900m by 2021 has drawn swift criticism of the Netherlands’ largest financial services company from unions. The layoffs represent slightly less than 12% of ING’s 52,000 workforce, because nearly 1,000 are expected to come at suppliers rather than at the bank itself. But they are the heaviest since 2009, when ING was forced to restructure and spin off its insurance activities after receiving a state bailout during the financial crisis. Unions were highly critical.

“I don’t think this was the intention of the [government] when it kept ING afloat with bailout money,” Ike Wiersinga of the Dutch union CNV said. In Belgium, where the number of jobs lost will be highest, labour leader Herman Vanderhaegen called the decision a “horror show” and said workers would strike on Friday 7 October. Although other large banks have announced mass layoffs at branch offices in the past year to boost profitability, ING said the job cuts were partly to combine technology platforms and risk-control centres, as well to help it to contend with regulatory burdens and low interest rates.

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Race is an invention to justify terrorizing groups of people.

Why Biologists Don’t Believe In Race (BBG)

Race is perhaps the worst idea ever to come out of science. Scientists were responsible for officially dividing human beings into Europeans, Africans, Asians and Native Americans and promoting these groups as sub-species or separate species altogether. That happened back in the 18th century, but the division lends the feel of scientific legitimacy to the prejudice that haunts the 21st. Racial tension proved a major point of contention in the first 2016 presidential debate, and yet just days before, scientists announced they’d used wide-ranging samples of DNA to add new detail to the consensus story that we all share a relatively recent common origin in Africa.

While many human species and sub-species once roamed the planet, there’s abundant evidence that beyond a small genetic contribution from Neanderthals and a couple of other sub-species, only one branch of humanity survived to the present day. Up for grabs was whether modern non-Africans stemmed from one or more migrations out of Africa. The newest data suggests there was a single journey – that sometime between 50,000 and 80,000 years ago, a single population of humans left Africa and went on to settle in Asia, Europe, the Americas, the South Pacific, and everywhere else. But this finding amounts to just dotting the i’s and crossing the t’s on a scientific view that long ago rendered notion of human races obsolete.

“We never use the term ‘race,’ ” said Harvard geneticist Swapan Mallick, an author on one of the papers revealing the latest DNA-based human story. “We’re all part of the tapestry of humanity, and it’s interesting to see how we got where we are.” That’s not to deny that people vary in skin color and other visible traits. Whether you’re dark or light, lanky or stocky depends in part on the sunlight intensity and climate in the regions where your ancestors lived. Nor is it to deny that racism exists – but in large part, it reflects a misinterpretation of those superficial characteristics. “There is a profound misunderstanding of what race really is,” Harvard anthropology professor Daniel Lieberman said at an event the night after the presidential debate. “Race is a scientifically indefensible concept with no biological basis as applied to humans.”

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Titanic and the Deckchairs. Nice name for a band. But with this I’m more convinced than ever that we will need to put the death penalty on killing elephants and lions and many other species. And we have to put our armies to good use, ours, not that of the military-industrial complex. Mankind will not survive with the natural world that gave birth to it, thoroughly decimated. And if you doubt that, ask yourself why on earth we should take the chance. And have our children know the most iconic animals on earth only from photos from the past.

Bid For Strongest Protection For All African Elephants Defeated At Summit (G.)

A bid to give the highest level of international legal protection to all African elephants was defeated on Monday at a global wildlife summit. The EU played a pivotal role in blocking the proposal, which was fought over by rival groups of African nations. But the Convention on the International Trade in Endangered Species (Cites), meeting this week in Johannesburg, passed other new measures for elephants that conservationists say will add vital protection. All 182 nations agreed for the first time that legal ivory markets within nations must be closed. Separately, a process that could allow one-off sales of ivory stockpiles was killed and tougher measures to deal with nations failing to control poached ivory were agreed.

More than 140,000 of Africa’s savannah elephants were killed for their ivory between 2007 and 2014, wiping out almost a third of their population, and one elephant is still being killed by poachers every 15 minutes on average. The price of ivory has soared threefold since 2009, leading conservationists to fear the survival of the species is at risk. The acrimonious debate over elephant poaching has split African countries. Namibia, South Africa and Zimbabwe, which host about a third of all remaining elephants, have stable or increasing populations. They argue passionately that elephant numbers are also suffering from loss of habitat and killings by farmers and that they can only be protected by making money from ivory sales and trophy hunting.

[..] Kelvin Alie, at the International Fund for Animal Welfare, said the failure to put all elephants on appendix one was a disaster: “This is a tragedy for elephants. At a time when we are seeing such a dramatic increase in the slaughter of elephants for ivory, now was the time for the global community to step up and say no more.”

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FIghting rages across Afghanistan as we speak. It has ever since ‘western interests’ invaded.

EU Signs Deal To Deport Unlimited Numbers Of Afghan Asylum Seekers (G.)

The EU has signed an agreement with the Afghan government allowing its member states to deport an unlimited number of the country’s asylum seekers, and obliging the Afghan government to receive them. The deal has been in the pipeline for months, leading up to a large EU-hosted donor conference in Brussels this week. According to a previously leaked memo, the EU suggested stripping Afghanistan of aid if its government did not cooperate. The deal, signed on Sunday, has not been made public but a copy seen by the Guardian states that Afghanistan commits to readmitting any Afghan citizen who has not been granted asylum in Europe, and who refuses to return to Afghanistan voluntarily. It is the latest EU measure to alleviate the weight of the many asylum seekers who have arrived since early 2015. Afghans constituted the second-largest group of asylum seekers in Europe, with 196,170 applying last year.

While the text stipulates a maximum of 50 non-voluntary deportees per chartered flight in the first six months after the agreement, there is no limit to the number of daily deportation flights European governments can charter to Kabul. With tens of thousands set to be deported, both sides will also consider building a terminal dedicated to deportation flights at Kabul international airport. The agreement, Joint Way Forward, also opens up the deportation of women and children, which at the moment almost exclusively happens from Norway: “Special measures will ensure that such vulnerable groups receive adequate protection, assistance and care throughout the whole process.” If family members in Afghanistan cannot be located, unaccompanied children can be returned only with “adequate reception and care-taking arrangement having been put in place in Afghanistan”, the text says.

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On and on and on and on.

Over 6,000 Migrants Rescued From Mediterranean In A Single Day, 22 Dead (R.)

About 6,055 migrants were rescued and 22 found dead on the perilous sea route to Europe on Monday, one of the highest numbers in a single day, Italian and Libyan officials said. Italy’s coastguard said at least nine migrants had died and a pregnant woman and a child had been taken by helicopter to a hospital on the Italian island of Lampedusa, halfway between Sicily and the Libyan coast. Libyan officials said 11 migrant bodies had washed up on a beach east of the capital, Tripoli, and another two migrants had died when a boat sank off the western city of Sabratha. One Italian coast guard ship rescued about 725 migrants on a single rubber boat, one of some 20 rescue operations during the day.

About 10 ships from the coast guard, the navy and humanitarian organisations were involved in the rescues, most of which took place some 30 miles off the coast of Libya. Libyan naval and coastguard patrols intercepted three separate boats carrying more than 450 migrants, officials said. Monday was the third anniversary of the sinking of a migrant boat off the Italian island of Lampedusa in which 386 people died. According to the International Organisation for Migration, around 132,000 migrants have arrived in Italy since the start of the year and 3,054 have died.

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Jun 042016
 
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Walker Evans Street Scene, Vicksburg, Mississippi 1936

The Funniest BLS Jobs Report Ever (Quinn)
US Payrolls Huge Miss: Worst Since September 2010 (ZH)
This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)
Lew Says China’s Overcapacity Skewing Markets (BBG)
UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)
Schroedinger’s Assets (Coppola)
Homes Should Be Lived In, Not Traded (G.)
EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)
Greek Banks Mulling Special NPL Vehicles (Kath.)
A Russian Warning (Dmitry Orlov et al)
20,000 Migrants Wait For Boats To Take Them To UK (DM)
At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)
Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Is the narrative falling apart?

The Funniest BLS Jobs Report Ever (Quinn)

Only a captured government drone could put out a report showing only 38,000 new jobs created, with the working age population rising by 205,000, and have the balls to report the unemployment rate plunged from 5.0% to 4.7%, the lowest since August 2007. If you ever needed proof these worthless bureaucrats are nothing more than propaganda peddlers for the establishment, this report is it. The two previous months were revised significantly downward in the fine print of the press release. It is absolutely mind boggling that these government pond scum hacks can get away with reporting that 484,000 people who WERE unemployed last month are no longer unemployed this month.

Life is so fucking good in this country, they all just decided to kick back and leave the labor force. Maybe they all won the Powerball lottery. How many people do you know who can afford to just leave the workforce and live off their vast savings? In addition, 180,000 more Americans left the workforce, bringing the total to a record 94.7 million Americans not in the labor force. The corporate MSM will roll out the usual “experts” to blather about the retirement of Baby Boomers as the false narrative to deflect blame from Obama and his minions. The absolute absurdity of the data heaped upon the ignorant masses is clearly evident in the data over the last three months.

Here is government idiocracy at its finest:
• Number of working age Americans added since March – 406,000
• Number of employed Americans since March – NEGATIVE 290,000
• Number of Americans who have supposedly voluntarily left the workforce – 1,226,000
• Unemployment rate – FELL from 5.0% to 4.7%

Talk about perpetrating the BIG LIE. Goebbels and Bernays are smiling up from the fires of hell as their acolytes of propaganda have kicked it into hyper-drive. We only need the other 7.4 million “officially” unemployed Americans to leave the work force and we’ll have 0% unemployment. At the current pace we should be there by election time. I wonder if Cramer, Liesman, or any of the other CNBC mouthpieces for the establishment will point out that not one single full-time job has been added in 2016. There were 6,000 less full-time jobs in May than in January, while there are 572,000 more low paying, no benefits, part-time Obama service jobs. Sounds like a recovery to me.

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“..a massive surge in people not in the labor force..” We’re approaching negative employment.

US Payrolls Huge Miss: Worst Since September 2010 (ZH)

If anyone was “worried” about the Verizon strike taking away 35,000 jobs from the pro forma whisper number of 200,000 with consensus expecting 160,000 jobs, or worried about a rate hike by the Fed any time soon, you can sweep all worries away: moments ago the BLS reported that in May a paltry 38,000 jobs were added, a plunge from last month’s downward revised 123K (was 160K). The number was the lowest since September 2010! The household survey was just as bad, with only 26,000 jobs added in May, bringing the total to 151,030K. This happened as the number of unemployed tumbled from 7,920K to 7,436K driven by a massive surge in people not in the labor force which soared to a record 94,7 million, a monthly increase of over 600,000 workers.

As expected Verizon subtracted 35,000 workers however this was more than offset by a 36,000 drop in goods producing workers. Worse, there was no offsetting increase in temp workers (something we caution recently), and no growth in trade and transportation services. What is striking is that while the deteriorationg in mining employment continued (-10,000), and since reaching a peak in September 2014, mining has lost 207,000 jobs, for the first time the BLS acknowledged that the tech bubble has also burst, reporting that employment in information declined by 34,000 in May. The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000.

With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged 116,000 per month. There is no way to spin this number as anything but atrocious.

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And growing..

This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)

On July 1, 2005, the Chairman of then President George W. Bush’s Council of Economic Advisors told a reporter from CNBC that “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” His name was Ben Bernanke. And within a year he would become Chairman of the Federal Reserve. Of course, we now know that he was dead wrong. The housing market crashed and dragged the US economy with it. And Bernanke spent his entire tenure as Fed chairman dealing with the consequences. One of the chief culprits of this debacle was the collapse of the sub-prime bubble.

Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honoring the terms of the loan. When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers. The deals got even sweeter, with banks making 102% and even 105% loans. In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket. So basically these subprime home buyers were getting paid to borrow money.

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They know this already, Jack.

Lew Says China’s Overcapacity Skewing Markets (BBG)

The U.S. will push China to reduce excess capacity in its economy at upcoming talks in Beijing, with Treasury Secretary Jacob J. Lew calling it an “area of central concern” Friday in Seoul. The issue bears watching when “excess capacity is distorting markets and important global commodities,” Lew said in remarks to reporters ahead of the U.S.-China Strategic and Economic Dialogue, scheduled for June 6-7 in Beijing. China Vice Premier Wang Yang, State Councilor Yang Jiechi and U.S. Secretary of State John Kerry will attend the meeting along with Lew. A senior Treasury official told reporters China has made a commitment to take serious action to reduce excess capacity in areas like steel and aluminum.

It’s a tough transition, especially as millions of workers would have to find new jobs. However, if the actions aren’t taken, excess capacity will continue to erode China’s economic growth prospects, said the official, who asked not to be identified. Chinese authorities are cutting excess capacity in industries including coal and steel while striving to keep growth above their 6.5% minimum target for this year. The economy has endured four years of factory-gate deflation, though forecasters expect that to turn around. Producer prices will improve in each of the next four quarters and turn positive in 2018, according to economists surveyed by Bloomberg in April.

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At what fee for UBS?

UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)

UBS is advising its wealthiest clients to stick with hedge funds even after the $2.9 trillion industry had its worst start to a year since 2008. While the days of “double-digit and triple-digit returns” for hedge funds are over, they still generate enough to satisfy yield-hungry clients who face negative interest rates, said Mark Haefele, global CIO of UBS Wealth Management. “Their performance in the first half hasn’t been impressive but they provide diversification,” he said in an interview with Bloomberg. “They still provide a better risk-reward or different risk-reward than other parts like sovereign bonds.”

UBS in April boosted its recommended allocation to hedge funds to 20% from 18%, saying the strategy will provide stability from volatile markets. The move comes as a net $15 billion was pulled from the global hedge-fund industry in the the first quarter and as some of world’s largest institutions including MetLife said they will scale back their holdings. Hedge funds may lose about a quarter of their assets in the next year as performance slumps Blackstone’s billionaire president, Tony James, predicted last week. The HFRI Fund Weighted Composite Index declined 0.6% in the first quarter, its worst start to a year since 2008.

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The number of non-dead assets is much higher than we let on.

Schroedinger’s Assets (Coppola)

In a new paper, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure. Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised. Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is greater than zero but less than 100%:

“The sequence of events, and the set of alternative states that may be reached, within each period is indicated in Figure 1. In subperiod 1, a financial market is open in which bankers issue short-term safe liabilities and acquire risky durables, and households decide on the cash balances to hold for use by the shopper. In subperiod 2, information is revealed about the possibility that the durable goods purchased by the banks will prove to be valueless. With probability p, the no crisis state is reached, in which it is known with certainty that the no collapse in the value of the assets will occur, but with probability 1-p, a crisis state is reached, in which it is understood to be possible (though not yet certain) that the assets will prove to be worthless. Finally, in subperiod 3, the value of the risky durables is learned.”

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Close to my heart, but very incomplete in its argumentation.

Homes Should Be Lived In, Not Traded (G.)

The problem is twofold: the move to viewing houses as assets, a predictable investment that lets you turn a profit and offers more return on the pound than a pension, means there’s an incentive for wealthy buyers to invest in bricks and mortar without bothering with tenants. But also, as long as our economy gets sucked into a south-east vortex, more people will head to the capital for work, as the rest of the country struggles. George Osborne’s northern powerhouse claims to address this imbalance, twinned with the excruciatingly named “Midlands engine”. But with the announcement that 250 jobs in the very department responsible for rolling out the northern powerhouse are moving from Sheffield to London, that commitment looks as weak as the efforts to give it a catchy moniker.

As long as jobs fail to materialise in post-industrial towns, empty terraces will multiply. Conservative politicians have long opined that people seeking work should “get on their bike”, without stopping to observe that many do: hence the brain drain from the north and Wales, and the exponential demand for housing in the south-east England. Houses should be lived in, most people would agree: so the government’s move to criminalise squatting is key to understanding the problem of empty houses. Contrary to scare stories, people don’t pop out for a pint of milk and find that squatters have moved in to their home. Squatters often took up residence in vacant buildings, and used the houses for their intended purpose: living in.

Prosecuting squatters reasserts people’s right to treat homes as assets, not shelter. When it comes to empty houses, it’s the inequality stupid. The inequality that means some can buy multiple houses, while others cannot rent one. That sees London swallowing up wealth, jobs and land value hikes, while parts of the country grow desolate. There shouldn’t be empty homes while some people sleep on the streets, but the fact that so many lie empty should worry us: many houses aren’t homes, they’re investment vehicles, and long term, they scupper all our chances of financial and social security.

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Selling off a country in peace.

EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)

The European Commission directly intervened in the work of the Greek Justice and demanded that EU technocrats working at the Greek Privatization Fund enjoy “immunity.” The EC intervenes two days after corruption prosecutors in Athens raised charges against 3 Greeks and 3 EU-nationals of the HRADF for selling public assets thus causing losses of several millions of euro to the state. On Friday, EC spokesman Margaritis Schinas told reporters in Brussels that EU experts working in Greece under the Greek program, should enjoy some kind of ‘guarantee’. “For us, satisfactory operating margins should be guaranteed for all European experts assisting Greece to improve its economy and find its way back to growth,” Schinas said.

At the same time, he stressed that “there is full respect to judicial procedures” currently under way against 6 members of the old Privatization Fund.but the invervention was clear. Schinas did not elaborate on the Eurogroup request referring to immunity for EU technocrats who will work for the new Greek Privatization Fund. The EC intervention came right after the corruption prosecutors raised charges against 6 members of the TAIPED for the sale of 28 public assets. Three of those members are Greeks, the other three from Italy, Spain and Slovakia appointed by the Eurogroup. The six have been investigated for the period 2013-2014 and have been called to testify before corruption investigator Costas Sargiotis.

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Yeah, let’s create some more creativity.

Greek Banks Mulling Special NPL Vehicles (Kath.)

Greece’s core banks are considering the creation of special purpose companies which will receive large portfolios of nonperforming loans and then be sold so that they stop burdening the lenders’ financial figures, as NPLs now exceed €100 billion in total. The ECB is asking bank managers to proceed with tackling this huge matter at a speedier pace and to make brave decisions for the drastic slashing of bad loans from their finances. In this context, one of the plans being examined concerns the special vehicles to be created with NPL portfolios and sold off not to third parties but to the existing stakeholders of the banks.

This creation of what would resemble a “bad bank” for each lender would serve to immediately lighten the credit sector’s financial reports, while the transfer of those vehicles to the existing stakeholders could offer them future benefits from the active management of those bad loans. Nowadays the biggest obstacle to the sale of NPLs to third parties is the great distance between buyers and sellers. The buyers of bad loans want to acquire such portfolios at exceptionally low prices, due to the country risk, the devaluation of assets owing to the protracted recession in Greece, the inefficient legal system etc. On the other hand, the sellers – i.e. the banks – are refusing to sell at such low prices as they appear certain that among the current NPL stock that reaches up to 55 percent of all loans there is a huge volume of debts that could revert to normality with the right management.

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They are not kidding.

A Russian Warning (Dmitry Orlov et al)

We, the undersigned, are Russians living and working in the USA. We have been watching with increasing anxiety as the current US and NATO policies have set us on an extremely dangerous collision course with the Russian Federation, as well as with China. Many respected, patriotic Americans, such as Paul Craig Roberts, Stephen Cohen, Philip Giraldi, Ray McGovern and many others have been issuing warnings of a looming a Third World War. But their voices have been all but lost among the din of a mass media that is full of deceptive and inaccurate stories that characterize the Russian economy as being in shambles and the Russian military as weak—all based on no evidence. But we—knowing both Russian history and the current state of Russian society and the Russian military, cannot swallow these lies. We now feel that it is our duty, as Russians living in the US, to warn the American people that they are being lied to, and to tell them the truth.

And the truth is simply this: If there is going to be a war with Russia, then the United States will most certainly be destroyed, and most of us will end up dead. Let us take a step back and put what is happening in a historical context. Russia has suffered a great deal at the hands of foreign invaders, losing 22 million people in World War II. Most of the dead were civilians, because the country was invaded, and the Russians have vowed to never let such a disaster happen again. Each time Russia had been invaded, she emerged victorious. In 1812 Nepoleon invaded Russia; in 1814 Russian cavalry rode into Paris. On June 22, 1941, Hitler’s Luftwaffe bombed Kiev; On May 8, 1945, Soviet troops rolled into Berlin.

But times have changed since then. If Hitler were to attack Russia today, he would be dead 20 to 30 minutes later, his bunker reduced to glowing rubble by a strike from a Kalibr supersonic cruise missile launched from a small Russian navy ship somewhere in the Baltic Sea. The operational abilities of the new Russian military have been most persuasively demonstrated during the recent action against ISIS, Al Nusra and other foreign-funded terrorist groups operating in Syria. A long time ago Russia had to respond to provocations by fighting land battles on her own territory, then launching a counter-invasion; but this is no longer necessary. Russia’s new weapons make retaliation instant, undetectable, unstoppable and perfectly lethal.

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Be afraid! There’s only 60 million of you!

20,000 Migrants Wait For Boats To Take Them To UK (DM)

A file lying in the drawer of the manager’s office at a small French seaside hotel provides intriguing clues about the gangsters who smuggle migrants across the Channel to Britain. It contains the passport details of four shadowy men who booked in for a night to pull off an audacious crime by trafficking 30 Pakistanis and Albanians by sea into the UK. Gangs of people smugglers now operate along all 450 miles of the north French coast — from Calais on the Belgian border to Cherbourg and beyond — as 20,000 migrants wait to get to England for a new life. During the past week they have used small fishing vessels, private yachts and speedboats to slip migrants onto England’s South Coast beaches under cover of darkness.

Early last Sunday, 18 migrants were rescued in Dymchurch, a coastal village in Kent, after their rubber dinghy began to sink offshore. The same morning, eight migrants were rescued by a lifeboat in Portsmouth harbour as they floated adrift in a fishing boat. The determination of migrants and the greed of traffickers has not been diminished by the French government’s demolition in March of the ‘Jungle’ migrant camp in Calais, an unhygienic shanty town of 4,000. The migrants simply moved on — initially 30 or so miles away to Dunkirk, where thousands live in a camp near the port, paying traffickers to cross the Channel, and then spreading further along the coast.

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How many boats and bodies sink that we never hear about?

At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)

More than 110 bodies were found along a Libyan beach after a smuggling boat of mostly African migrants sank, while a separate search-and-rescue operation across the Mediterranean saved 340 people Friday and recovered nine bodies. The developments were the latest deadly disasters for refugees and migrants seeking a better life in Europe, and they followed the drownings of more than 1,000 people since May 25 while attempting the long and perilous journey from North Africa to southern Europe. As traffickers take advantage of improving weather, officials say it is impossible to know how many unseaworthy boats are being launched — and how many never reach their destination. Naval operations in the southern Mediterranean, co-ordinated by Italy, have been stretched just responding to the disasters they do hear about.

At least 117 bodies — 75 women, six children and 36 men — washed up on a beach or were pulled from the water near the western Libyan city of Zwara Thursday and Friday, Mohammed al-Mosrati, a spokesman for Libya’s Red Crescent, told The Associated Press. All but a few were from African countries. The death toll was expected to rise. The children were aged between 7 and 10, said Bahaa al-Kwash, a top media official in the Red Crescent. “It is very painful, and the numbers are very high,” he said, adding that the dead were not wearing life jackets — something the organization had noticed about bodies recovered in recent weeks. “This is a cross-border network of smugglers and traffickers, and there is a need for an international effort to combat this phenomenon,” he said.

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Crete is a somewhat novel destination.

Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Hundreds of migrants were rescued on Friday after a smuggling boat sank in international waters south of Crete, while the Hellenic Coast Guard recovered the bodies of at least nine drowned migrants. The 25-meter vessel capsized in the early hours of Friday morning under circumstances that remained unclear, leaving hundreds of migrants in the sea, some 70 nautical miles south of Crete. According to the International Organization for Migration, around 700 migrants had been aboard the vessel. Five ships – cargo and commercial vessels – had been near the scene and offered assistance, rescuing scores of migrants. The Hellenic Coast Guard sent two vessels while the navy dispatched two Super Puma helicopters to scour the area.

By late Friday, 340 migrants had been rescued and the bodies of nine migrants pulled out of the sea by rescue workers. Another vessel capsized off the coast of Libya on Friday, leading to a larger death toll, with more than 100 bodies found in the sea. Meanwhile authorities on the islands of the eastern Aegean expressed concern as tensions are rising at detention centers and frequently escalating into brawls. The influx of migrants to the islands, which had all but stopped in recent weeks, following a deal between the European Union and Ankara to return migrants to Turkey, appears to have picked up again, unnerving authorities. A group of 120 migrants arrived on Chios Friday and another 25 on Lesvos.

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Jun 012016
 
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Arthur Rothstein Steam shovels on flatcars, Cherokee County, Kansas 1936

China’s Debt Bubble Bigger Than Subprime Bubble (MW)
Yuan Tumbles As China PMI Miraculously Hugs Flatline (ZH)
Double Blow for China Banks as Fed Worry Meets June Cash Crunch (BBG)
Hong Kong April Retail Sales Fall 7.5%, 14th Straight Month (R.)
Abenomics “Death Cross” Strikes As Japan PMI Plunges To 40-Month Lows (ZH)
Pension Funds Pile on Risk Just to Get a Reasonable Return (WSJ)
Germany: Draghi v the Banks (FT)
The Most Powerful Man in Banking (WSJ)
Central Banks As Pawnbrokers Of Last Resort (M. Wolf)
Germany Considers Easing of Russia Sanctions (Spiegel)
Elephants In Tanzania Reserve Could Be Wiped Out By 2022 (AFP)
Mediterranean Death Toll Soars In First 5 Months Of 2016 (UNHCR)
Frontex Denies, Prevents Help To Refugees: Witnesses (MEE)

“The problem is that the banking sector in China has been pushing out new lending aggressively, but with slowing economic growth many loans have not gone to create more factories and jobs but to financial assets that have been leveraged to boost returns..”

China’s Debt Bubble Bigger Than Subprime Bubble (MW)

Unproductive debt in China—that is, debt that’s used to drive up asset prices—swelled in 2015, eclipsing the level seen in the U.S. in the run-up to the Great Financial Crisis, said Torsten Slok, chief international economist at Deutsche Bank, in a note to clients published Tuesday. Slok’s findings are illustrated in the chart below, where he compares the level of credit growth required in the U.S. and China to generate 1percentage point of GDP growth. (He notes that the red bar for 2015 also grew, suggesting more credit growth is now required in the U.S. to produce onepercentage point of GDP growth).

Chinese officials are partly responsible for the expansion of credit last year, analysts say, as the People’s Bank of China lessened requirements regarding the collateral lenders put up to borrow funds from the central bank, among other stimulus measures. The move was meant to spur economic growth, the pace of which slowed last year, stoking fears that it could precipitate a sharp global downturn. The world’s second-largest economy saw growth slow to 6.8% in 2015—missing the government’s target for 7% growth by a hair. In the first quarter of 2016, the country’s economy grew at an annual rate of 6.7%, its slowest pace since 2009.

It’s important to note, however, that many economists believe Chinese data overstates the strength of its economy. Over the past year, Chinese stocks, and more recently commodities like iron ore and steel rebar traded in China, have seen a series of dizzying rallies and frightening crashes as investors, emboldened by easy credit engage in speculation. “The problem is that the banking sector in China has been pushing out new lending aggressively, but with slowing economic growth many loans have not gone to create more factories and jobs but to financial assets that have been leveraged to boost returns,” Slok said.

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Everyone, US, Japan and EU too, needs that services PMI to flourish, but…

Yuan Tumbles As China PMI Miraculously Hugs Flatline (ZH)

Since May 2012, China Manufacturing PMI has miraculously stayed within a 1 point range of the knife-edge 50 level between contraction and expansion. May 2015 just printed 50.1, the same as April with New Orders weaker and business activity expectations (hope) tumbling to 4 month lows. The Steel Industry PMI collapsed from 57.3 to 50.9 with New Steel Orders collapsing from 65.6 to 52.7 – the biggest monthly drop in record. And while non-manufacturing PMI remained in ‘expansion territory at 53.1, it fell back from a brief bounce in April with employment and business expectations both weaker. For now, equity markets are unreactive but offshore Yuan is tumbling on the news, not helped by a sizable devaluation in the official fix. The magic of manufacturing data… as non-manufacturing slowly catches down…

Disappointment triggering more offshore Yuan selling… Not helped by yet another devaluation by PBOC…
*CHINA SETS YUAN FIXING AT 6.5889 VS 6.5790 DAY EARLIER
*PBOC CUTS YUAN FIXING TO LOWEST LEVEL SINCE 2011 FOR THIRD DAY

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Refinancing is becoming a major problem.

Double Blow for China Banks as Fed Worry Meets June Cash Crunch (BBG)

Shanghai’s money market is braced for higher borrowing costs as a credit-fueled economic recovery coincides with the prospect of higher U.S. interest rates in June, a month that has historically seen funding crunches in China. The overnight interbank lending rate averaged 1.99% in May, up from 1.18% a year ago, as Federal Reserve tightening weakened the yuan, spurring capital outflow pressures. That borrowing cost has climbed every June since 2011, as lenders hoard deposits ahead of quarter-end regulatory checks. The cost of fixing rates in the swap market is surging as data showed property leading a rebound in investment in the world’s second-biggest economy.

“The internal and external factors combined will certainly add pressure to the money market in June, driving interest rates higher,” said Liu Dongliang at China Merchants Bank, the nation’s sixth-largest lender. “We’re not optimistic about the bond market in the short term.” Any cash crunch would aggravate a rout in bonds that led to 190.6 billion yuan ($28.9 billion) in canceled sales this quarter, making it harder for issuers to refinance a record amount of maturing debt. The overnight money rate has been moving in tandem with the weakening currency in the past year after touching a six-year low, as estimated outflows reached $1 trillion in the past year, according to a gauge compiled by Bloomberg.

The yuan declined 1.5% in May as Federal Reserve Chair Janet Yellen said that evidence of strength in the U.S. economy means there could be an increase in borrowing costs in the coming months. The probability of Fed action in June has surged to 24% from 12% at the end of April, while the premium for China’s one-year sovereign yield over U.S. Treasuries has narrowed to a seven-week low. The People’s Bank of China has an incentive to keep monetary conditions relatively tight as it looks to control the yuan’s decline, rein in excessive lending by banks and keep a lid on inflation. The authority will create a neutral and appropriate monetary environment, it said in an article published in China Business News last week. The comments came after data showed the nation’s consumer price index maintained a 2.3% acceleration for the third month in April, a pace not seen since mid-2014.

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Mainland Chinese fail to appear.

Hong Kong April Retail Sales Fall 7.5%, 14th Straight Month (R.)

Hong Kong’s retail sales fell for the 14th successive month in April, as a drop in tourists and weak local consumption deepened the pain for retailers in the city. Retail sales in April slid 7.5% from a year earlier to HK$35.2 billion ($4.5 billion) in value terms, less than a 9.8% slump in March. In volume terms, April sales dropped 7.6%, government data showed on Tuesday. “Many types of retail outlet still recorded notable falls in sales, reflecting the continued drag from the slowdown in inbound tourism as well as the more cautious local consumer sentiment amid subpar economic conditions,” the government said in a statement.

Hong Kong is struggling with mounting economic challenges from the prospect of rising U.S. interest rates, which has stepped up capital outflows, and from China’s economic slowdown. Mainland tourists are avoiding the city amid political tensions with China and growing calls from radical activists for greater autonomy from Beijing. “The near-term outlook for retail sales will continue to depend on the performance of inbound tourism,” the government added.

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“Output tumbled at the fastest pace in 25 months and new orders are the worst since Jan 2013. This is the death cross for Abenomics..”

Abenomics “Death Cross” Strikes As Japan PMI Plunges To 40-Month Lows (ZH)

Since Abenomics was unleashed on the world (with QQE starting in April 2013), things have not worked out as the smartest men in the Japanese rooms predicted. In fact, with April’s final manufacturing PMI printing at 47.7, operating conditions in Japan worsened at the sharpest pace in 40 months… since Abe began his three arrows. Output tumbled at the fastest pace in 25 months and new orders are the worst since Jan 2013. This is the death cross for Abenomics… The weakest Japanese manufacturing PMI since the start of Abenomics…

Commenting on the Japanese Manufacturing PMI survey data, Amy Brownbill, economist at Markit, which compiles the survey, said: “The aftermaths of the earthquakes in one of Japan’s key manufacturing regions continued to weigh heavily on the manufacturing sector. Both production and new orders declined sharply midway through the second quarter of 2016. A marked fall in international demand also contributed to the drop in total new orders, as exports declined at the fastest rate since January 2013.” Flashing the “death cross” of Abenomics three arrows… As it is now clear that the massive expansion of the Bank of Japan balance sheet has done nothing… in fact worse than nothing… for the Japanese economy.

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Talk about a death cross…

Pension Funds Pile on Risk Just to Get a Reasonable Return (WSJ)

What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns. Thanks to rock-bottom interest rates in the U.S., negative rates in other parts of the world, and lackluster growth, investors are becoming increasingly creative—and embracing increasing risk—to bolster their performances. To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.

In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates, which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%. Nominal returns were used for the projections, but substituting in assumptions about real returns, adjusted for inflation, would have produced similar findings, said Jay Kloepfer, Callan’s head of capital markets research.

The amplified bets carry potential pitfalls and heftier management fees. Global stocks and private equity represent among the riskiest bets investors can make today, Mr. Kloepfer said. “Stocks are just ownership, and they can go to zero. Private equity can also go to zero,” said Mr. Kloepfer, noting bonds will almost always pay back what was borrowed, plus a coupon. “The perverse result is you need more of that to get the extra oomph.”

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How to destroy the euro from within.

Germany: Draghi v the Banks (FT)

In Dillingen an der Donau, a small town in rural Bavaria, the local Sparkasse savings bank is providing an unusual service. For customers who live a long way from a branch, it is giving out free bus tickets. And for those who cannot get to the bank at all — the old or sick, for example — it offers to send a member of staff directly to their homes to deliver small sums of cash. The Sparkasse came up with the idea to compensate for the fact that it was closing several branches as revenues dwindled due to interest rates being at a record low and customers visiting less frequently. “If your revenues are shrinking, then you have to do something about your costs,” says an official at the bank. “You have to economise.” The pressure on Germany’s army of savings banks is just one example of the increasing strains on the country’s financial system caused by the ultra-loose monetary policy of the Frankfurt-based ECB.

In a bid to jolt the eurozone’s lacklustre economy back to life , the central bank has, over the past five years, slashed interest rates to record lows and even pushed its deposit rate into negative territory. On top of this, it has launched a €1.7tn asset purchase programme, which has driven down bond yields across the continent. The measures have bought time for reform in the battered economies of southern Europe. Yet in Germany, they have met a blizzard of opposition. The country’s hawkish monetary policy establishment has always nurtured a degree of scepticism about the institution that succeeded the Bundesbank as the custodian of Germany’s monetary stability. But as savers, banks and insurers have been increasingly hurt by low interest rates — nominal yields on 10-year German bonds have fallen from about 4% in 2008 to less than 0.2% today — the criticism of the ECB has intensified.

The media has accused the central bank of fuelling a “social disaster”, while one bank has claimed that low interest rates will have deprived German households of €200bn between 2010 and the end of this year. Germany’s financial watchdog, BaFin, branded low rates a “seeping poison” for the country’s financial system. The most dramatic intervention, however, came from Wolfgang Schäuble, the hawkish finance minister, who blamed ECB president Mario Draghi for “half” the rise in support for Alternative for Germany, the rightwing, anti-immigration, anti-euro party. Mr Draghi hit back, archly noting that the ECB has a mandate “to pursue price stability for the whole of the eurozone, not only for Germany”, and argued that low borrowing costs were symptomatic of a glut in global savings for which Germany was partly to blame.

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“He’s judge and jury and everything else..”

The Most Powerful Man in Banking (WSJ)

The most important person in the banking business isn’t a banker. To most Wall Street executives, that title goes to Federal Reserve governor Daniel Tarullo, a brusque, white-haired former law professor who has come to personify Washington’s postcrisis influence over how banks do business. Mr. Tarullo heads the Fed’s Committee on Bank Supervision. On paper—and in practice for most of the previous decades—the post isn’t a hugely powerful one. But the 63-year-old took office at the Fed in 2009 at a moment of broad public support for a more aggressive tack and has pressed that advantage ever since. Financiers privately call Mr. Tarullo “the Wizard of Oz” for his behind-the-scenes sway over everything from corporate strategy to how many billions of dollars banks must maintain in capital.

Through the stress tests he championed to evaluate how banks might fare in another market shock, the Fed wields control over whether banks can raise the dividends they pay to shareholders. For a big bank in 2016, getting a stamp of approval from Mr. Tarullo is an effort consuming thousands of employees. The industry’s lawyers pore over transcripts of Mr. Tarullo’s dense speeches to grasp the meaning of every word. When Citigroup and Bank of America stumbled on the stress tests in recent years, each bank said it spent at least $100 million to correct the problems the Fed had called out. Peter Conti-Brown, a historian and author of “The Power and Independence of the Federal Reserve,” called Mr. Tarullo’s influence extraordinary. One former bank executive put a finer point on it: “He’s judge and jury and everything else,” he said.

Mr. Tarullo in an interview attributed his power to his longevity at the Fed and consensus with other regulators. And, he said, the full impact of the regulatory changes made on his watch have yet to be felt. “I think it likely that firms are going to have to change in some cases their size, in some cases their business model, and in some cases their organization,” he said. Mr. Tarullo’s influence illustrates the outsize role that government regulation now plays for banks. For most of the modern era, regulators took a more hands-off approach, monitoring the industry for abuses but stopping short of injecting themselves into bank operations. But the near collapse of the financial system in 2008 brought widespread criticism of regulators for not being more vigilant and changed the equation.

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“..governments try to make finance safer and finance exploits the support to make itself riskier.”

Central Banks As Pawnbrokers Of Last Resort (M. Wolf)

Will there be another huge financial crisis? As Hamlet said of the fall of a sparrow: “If it be now, ’tis not to come. If it be not to come, it will be now. If it be not now, yet it will come – the readiness is all.” So it is with banks. They are designed to fall. So fall they surely will. A recent book explores not only this reality but also a radical and original solution. What makes attention to this suggestion even more justified is that its author was at the heart of the monetary establishment before and during the crisis. He is Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy . The title is appropriate: alchemy lies at the heart of the financial system; moreover, banking was, like alchemy, a medieval idea, but one we have not as yet discarded. We must, argues Lord King, now do so.

As Lord King remarks, the alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”. This is a confidence trick in two senses: it works if, and only if, confidence is strong; and it is fraudulent. Financial institutions make promises that, in likely states of the world, they cannot keep. In good times, this is a lucrative business. In bad times, the authorities have to come to the rescue. It is little wonder, then, that financial institutions have become so large and pay so well. Consider any large bank. It will have a wide range of long-term and risky assets on its books, mortgages and corporate loans prominent among them. It will finance these with deposits (supposedly redeemable on demand), short-term loans and longer-term loans. Perhaps 5% will be financed by equity.

What happens if lenders decide banks might not be solvent? If they are depositors or short-term lenders, they can demand their money back immediately. Without aid from the central bank, the only institution able to create money without limit, banks will fail to meet that demand. Since a generalised collapse would be economically devastating, needed support is forthcoming. Over time, this reality has created a “Red Queen’s race”: governments try to make finance safer and finance exploits the support to make itself riskier. Broadly speaking, two radical solutions are on offer. One is to force banks to fund themselves with far more equity. The other is to make banks match liquid liabilities with liquid and safe assets. The 100% reserve requirements of the “Chicago plan”, proposed during the Great Depression, is such a scheme.

If liquid, safe liabilities finance liquid, safe assets — and risk-bearing, illiquid liabilities finance illiquid, unsafe assets — alchemy disappears. Finance would be safe. Unfortunately, the end of alchemy would also end much risk-taking in the system. Lord King offers a novel alternative. Central banks would still act as lenders of last resort. But they would no longer be forced to lend against virtually any asset, since that very possibility must create moral hazard. Instead, they would agree the terms on which they would lend against assets in a crisis, including relevant haircuts, in advance. The size of these haircuts would be a “tax on alchemy”. They would be set at tough levels and could not be altered in a crisis. The central bank would have become a “pawnbroker for all seasons”.

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The US will need to pressure a lot harder to keep the sanctions going.

Germany Considers Easing of Russia Sanctions (Spiegel)

As expected, G-7 leaders reiterated their hardline approach to Moscow in the Japan summit’s closing statement. Chancellor Angela Merkel complained last Thursday that there still isn’t a stable cease-fire in Ukraine and the law pertaining to local elections in eastern Ukraine, as called for by the Minsk Protocol, still hasn’t been passed. That, she said, is why “it is not to be expected” that the West will change its approach to Russia. What Merkel didn’t say, though, is that behind the scenes, her government has long since developed concrete plans for a step-by-step easing of the sanctions against Russia and that the process could begin as early as this year. Thus far, the message has been that the trade and travel restrictions will only be lifted once all the provisions foreseen by the Minsk Protocol have been fulfilled. 100% in return for 100%.

Now, however, Berlin is prepared to make concessions to Moscow – on the condition that progress is made on the Minsk process. “My approach has always been that sanctions are not an end in themselves. When progress is made on the implementation of the Minsk Protocol, we can also then talk about easing sanctions,” says Foreign Minister Frank-Walter Steinmeier. The Chancellery also supports the new approach. Thus far, it was the Social Democrats that were particularly vocal about rapprochement with Russia. Led by Economics Minister Gabriel, the SPD is Merkel’s junior coalition partner. While Steinmeier, also a senior SPD member, has never explicitly demanded the easing of sanctions, he has long supported Russia’s return to the G-7. Merkel, by contrast, had always maintained a hard line. Now, though, the Chancellery also appears to be changing course.

[..] more and more EU member states have begun questioning the strict penalty regime, particularly given that it hasn’t always been the Russians who have blocked the Minsk process. Despite Tusk’s apparent optimism, indications are mounting that getting all 28 EU members to approve the extension of the sanctions at the end of June might not be quite so simple. Berlin has received calls from concerned government officials whose governments have become increasingly skeptical of the penalties against Russia but have thus far declined to take a public stance against them. Members of some governments, though, have very clearly indicated that they are not interested in extending the sanctions in their current stringent form. Austrian Vice Chancellor Reinhold Mitterlehner is among the skeptics as is French Economics Minister Emmanuel Macron. So too are officials from Italy, Spain, Greece and Portugal.

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Time for the death penalty?! Time to put our armies to good use?

Elephants In Tanzania Reserve Could Be Wiped Out By 2022 (AFP)

Elephants in Tanzania’s sprawling Selous Game Reserve could be wiped out within six years if poaching continues at current levels, the World Wildlife Fund warned. Tanzania’s largest nature reserve was in the 1970s home to 110,000 elephants, but today only 15,000 remain and they are threatened by “industrial-scale poaching”. The Selous “could see its elephant population decimated by 2022 if urgent measures are not taken,” the WWF said. More than 30,000 African elephants are killed by poachers every year to supply an illegal trade controlled by criminal gangs that feeds demand in the Far East. Tanzania is among the worst-affected countries with a recent census saying the country’s elephant population fell by 60% in the five years to 2014.

The Selous reserve is a tourist draw contributing an estimated $6 million (5 million euros) a year to Tanzania’s economy, according to a study commissioned by WWF and carried out by advisory firm Dalberg. It is named after Frederick Selous, a British explorer, hunter and real-life inspiration for the H. Rider Haggard character Allan Quatermain in King Solomon’s Mines. “By early 2022 we could see the last of Selous’ elephants gunned down by heavily armed and well trained criminal networks,” the report said. The 55,000-square kilometre (21,000-square mile) reserve in southern Tanzania was named a World Heritage Site by UNESCO in 1982. But it was put on a watch list in 2014 as poaching spiked, with six elephants killed every day and industrial activities including oil and gas exploration, as well as mining, threatening the delicate environment.

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The sadness just intensifies.

Mediterranean Death Toll Soars In First 5 Months Of 2016 (UNHCR)

At least 880 people are believed to have drowned last week in a spate of shipwrecks and boat capsizings on the Mediterranean, the UN Refugee Agency said today. “For so many deaths to have occurred just in a matter of days and months is shocking and shows just how truly perilous these journeys are,” said UN High Commissioner for Refugees Filippo Grandi. UNHCR told a press briefing in Geneva that the latest figures were arrived at following new information received through interviews with survivors brought ashore in Italy.

“As well as three shipwrecks that were known to us as of Sunday, we have received information from people who landed in Augusta over the weekend that 47 people were missing after a raft carrying 125 people from Libya deflated,” UNHCR spokesperson William Spindler detailed. He added that eight others were reported separately to have been lost overboard from another boat, and four deaths were reported after fire on board another. “Thus far 2016 is proving to be particularly deadly. Some 2,510 lives have been lost so far compared to 1,855 in the same period in 2015 and 57 in the first five months of 2014,” Spindler added.

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“Everything started after the EU agreement,” he said. “These people are no longer refugees to them [the authorities]. They are prisoners and are being detained. But they have left the humanitarian aspect out of the story.”

Frontex Denies, Prevents Help To Refugees: Witnesses (MEE)

Frontex denied aid to refugees including a baby and kept them floating in the sea off Greece for nearly two hours, according to aid workers. Eyewitnesses told MEE that Frontex officers prevented aid workers helping 50 people as they landed on the northern shore of the Greek island of Lesbos early on Monday. Their tactic was to take them directly into detention “without any aid, even the injured,” one aid worker said. Witnesses also told MEE that officers from the Maltese branch of the European border control police prevented a doctor tending to a baby that was “unresponsive”. In a written statement to MEE, Frontex said the crew on the Maltese ship had followed a Hellenic Coast Guard officer’s instructions and that none of the volunteers identified themselves as a doctor.

The reports come as the UN says that more than 2,500 people have died trying to make the perilous journey across the Mediterranean to Europe so far in 2016, a sharp jump from the same period last year. In the past week alone, at least 880 people are believed to have died in a series of shipwrecks – but thousands of people have also been rescued in the last seven days, with some 90 rescue operations launched. Frontex, supported by a series of national fleets and coast guards as well as several NGOs and some private volunteers, is charged with carrying out rescue operations in the Mediterranean. However, witnesses told MEE that the boat crammed with refugees was made to float out at sea until Frontex ground units came to take the passengers away in buses, after the Greek coastguard granted permission for the landing at the fishing hamlet of Skala Skiaminias on Lesbos’s north coast.

Esther Camps, from Spanish NGO Proactiva, which provides aid and rescue operations at sea, was at the scene. She said the incident took place at around 01:00 on Monday morning – the arrivals, she said, included around 10 children, as well as women who were crying out for help. “We were told to do nothing and to ‘stay away’,” she told MEE. “As they [the refugees and migrants] were disembarking, we saw there was a baby that was not making any noise. One of the officers said the baby was ‘fine’ and kept us away. We said, ‘how do you know it is OK? You are not doctors.'” Camps, who has been working with Proactiva since December, said that babies normally cry when they are brought ashore, but that in this case the child was not making any noise. MEE understands that a doctor from the aid organisation Waha was also at the scene but was denied access.


Handout photo released as courtesy by German humanitarian NGO Sea-Watch shows a crew member holding a drowned baby as dead bodies were recovered after a wooden boat transporting migrants capsized off the Libyan coast on 27 May, 2016 (AFP)

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Apr 052016
 
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DPC Surf Avenue, Coney Island, NY 1903

Panama Bombshell Spells Demise Of Shadow Finance, And Privacy (AEP)
Tax Havens Don’t Need To Be Reformed. They Should Be Outlawed (Brooks)
Thousands Protest Demanding Icelandic PM’s Resignation (AFP)
German Banks Enmeshed In Panama Papers Leak (DW)
Data From Panama Law Firm Came From Employee, Not Hackers (Rijock)
Panama Papers Cause Guardian to Collapse into Self-Parody (OG)
China State Paper Sees ‘Powerful Force’ Behind Panama Leak (BBG)
The Forces of Globalization Are Sputtering (WSJ)
China Hard Landing Could Trigger Global Market Bloodbath: IMF (Tel.)
Lagarde Says Risks to Weak Global Recovery Are Increasing (BBG)
Subprime Housing Risks Raise Red Flags In China (WSJ)
Bond Market ‘Exhausted’ as Kuroda Stimulus Enters Fourth Year (BBG)
Sperm Whales Found Full of Car Parts and Plastics (NatGeo)
Turkey: The Business Of Refugee Smuggling & Sex Trafficking (ZH)
Italy Pleads For Greek-Style Push To Return Its Migrants (FT)
So The Greece Deportations Are Going ‘Smoothly’? Take A Closer Look (G.)

Ambrose bets on a substantial fall-out.

Panama Bombshell Spells Demise Of Shadow Finance, And Privacy (AEP)

The secret world of offshore banks and money-laundering has been under the microscope ever since the financial crisis. Now it is the turn of lawyers, registrars, and the hidden network of facilitators. The treasure trove of 11.5m documents leaked – or more precisely stolen – from the Panama law firm Mossack Fonseca lifts the lid on the extraordinary practices of the global elites, and on the alleged services of off-shore legal cabinets for terrorist organisations, drug cartels, sanctions busting, and front companies of all kinds. The files on 213,000 firms first slipped to the Suddeutsche Zeitung and then shared with the International Consortium of Investigative Journalists (ICIJ) is the biggest data leak in history. It will have long-lasting ramifications. The avalanche of allegations has barely begun.

The red-hot dossier on US citizens has not even been released. Yet the scandal has already triggered a string of criminal investigations around the world, kicking off in Australia and New Zealand within hours. Germany’s vice-chancellor Sigmar Gabriel said the files go far beyond issues of tax evasion, touching on vital national interests and the rule of law. “It is about organized crime, evasion of UN sanctions, and terrorist finance,” he said. “This shadow economy is a risk for global security. We must ban the anonymous letterbox companies. The international community must ostracize any country that allows these dirty dealings,” said Mr Gabriel. Mossack Fonseca’s clients include 23 people under sanctions for helping North Korea, Russia, Iran, Syria, and Zimbabwe. The Israeli newspaper Haaretz reports that 33 of those named are on the US black list for terrorism.

Panama has cornered the trade in anonymous shell companies that allow owners to disguise their identity and carry out global operations secretly. While this may be a legitimate for those in the limelight trying to protect their privacy or to safeguard sensitive corporate dealings, many use it to avoid detection for money-laundering, tax avoidance, or predatory behaviour. The country has pushed through reforms in a bid to clear its name and to get off the OECD’s ‘grey list’ of uncooperative tax havens, but has clearly not yet done enough. “Panama has an extremely aggressive and obstructive attitude. Dialogue has broken down,” said Pascal Saint-Amans, the OECD’s tax chief. “It is the last financial centre that has refused to implement global standards of fiscal transparency. There has been very strong pressure from the law firms on the Panamanian government.”

Mr Saint-Amans said offshore secrecy in on the wane in most of the world, but becoming more concentrated in Panama. “The majority of undeclared clients are coming clean in other locations, but those who don’t are going to Panama,” he said.

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Thing is, that’s been obvious for ages.

Tax Havens Don’t Need To Be Reformed. They Should Be Outlawed (Brooks)

The Panama Papers are not really about a central American state. They are a glimpse through a Panamanian keyhole of an orgy of tax evasion, money laundering and kleptocracy – amid the legitimate financial planning – hosted by the world’s tax havens. Seven years after world leaders came together at a post-financial crisis G20 summit in London and committed to end tax haven abuse, it is clear from these papers that no such end is in sight. The good intentions have translated into a blizzard of international agreements on sharing information, amnesties through which tax evaders can come clean, and prosecution drives of variable quality to nail the cheats. All are demonstrably inadequate. Information will not, and cannot, be exchanged to any meaningful extent by countries and territories whose “offer” is that they don’t ask for it or will turn a blind eye to being deceived.

Amnesties teach rich tax evaders that, even if they are caught, they will get off far more lightly than somebody overclaiming a few pounds in social security benefits. Criminal pursuit of offenders, certainly in the UK, is little more than a joke. One prosecution from 1,000 tax evaders using HSBC’s Swiss accounts is the now infamously poor punchline. Here, the Panama Papers lay bare another national disgrace: Britain’s longstanding role at the centre of the offshore web. More than half of the 200,000 secret companies set up by the Panama lawyers Mossack Fonseca were registered in the British Virgin Islands, where details of company ownership don’t have to be filed with the authorities, never mind be made public. While this week’s leak is on an unprecedented scale, it exposes a historic as well as current failing.

As the British empire faded away after the second world war and territories such as the British Virgin Islands drifted into the constitutional limbo of semi-independence, they were encouraged to develop financial services as a way of sustaining precarious economies. If this meant a few of the world’s wealthier people paid a little less tax, thought successive British governments, it was a price worth paying for not having to support the territories. Late 20th-century financial liberalisation turned this already complacent calculation into something more lethal. With fortunes sloshing freely across borders, tax havens became voracious parasites on the world economy, most seriously sucking the life out of some of its poorer parts. All the great national robbers of recent decades, such as Nigeria’s Sani Abacha, have used tax haven companies, including British Virgin Islands ones, as the getaway cars.

Despite this long trail of evidence, leading economies refuse to address the problem at its source. The UK has great leverage over its 17 overseas territories and crown dependencies, all of which depend on the mother country for security and happily trade off its legal system. At a stroke our government could shut down the British Virgin Islands corporate system, for example. But under influence from a banking system that thrives on the legal benefits of offshore centres such as the British Virgin Islands and the Cayman Islands, it takes a more relaxed view. Asked recently about whether Britain’s overseas territories should publish registers of beneficial owners of their companies, foreign office minister James Duddridge replied that these were a “direction, rather than an ultimate destination”. The Panama Papers should expose this indifference for the great scandal that it is.

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Gone tomorrow.

Thousands Protest Demanding Icelandic PM’s Resignation (AFP)

Thousands of Icelanders took to the streets late Monday calling for their prime minister’s resignation after leaked tax documents dubbed the “Panama Papers” prompted allegations that he and his wife used an offshore firm to hide million-dollar investments. Protesters filled the square outside Iceland’s parliament in Reykjavik, footage on public television RUV showed, answering a call from opposition parties to demonstrate against Prime Minister Sigmundur David Gunnlaugsson. Police provided no estimate of the size of the crowd, but said the demonstrators outnumbered the thousands who in 2009 brought down the right-wing government over its responsibility in Iceland’s 2008 banking collapse.

“Take responsibility” and “Where is the new constitution?” read some of the signs carried by demonstrators on Monday, referring to the country’s new charter drawn up after the 2009 political crisis and which has since been held up in parliament. Financial records published by the International Consortium of Investigative Journalists showed that Gunnlaugsson, 41, and his wife Anna Sigurlaug Palsdottir bought the offshore company Wintris Inc. in the British Virgin Islands in December 2007. The company was intended to manage Palsdottir’s inheritance from her wealthy businessman father, the amount of which has not been disclosed. Gunnlaugsson transferred his 50% stake to his wife at the end of 2009, for the symbolic sum of one dollar.

But when he was elected a member of parliament for the first time in April 2009 as a member of the centre-right Progressive Party, he neglected to mention the stake in his declaration of shareholdings, as required by law. Gunnlaugsson has meanwhile denied any wrongdoing or tax evasion and insisted Monday he would not step down. He said he never hid any money abroad and that his wife paid all her taxes on the company in Iceland. A motion of no-confidence was presented to parliament by the opposition, and will be submitted to a vote at an as yet undetermined date. Almost 28,000 Icelanders, in a country of just 320,000 inhabitants, have also signed a petition demanding his resignation.

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All global banks are involved.

German Banks Enmeshed In Panama Papers Leak (DW)

The two German financial institutions specifically mentioned in media reports as having helped high-ranking politicians, celebrities and sports stars hide their money abroad were Deutsche Bank, Germany’s largest lender, and the Hamburg-based Berenberg bank. The allegations were part of the so-called Panama Papers, a massive trove of leaked emails, PDFs and other records that expose a world of letterbox companies and business arrangements that until recently had been largely hidden from public view. The Panama Papers were first obtained by reporters at the German daily “Süddeutsche Zeitung,” and on Sunday, the head of the paper’s investigative unit suggested to a German TV host that every bank in Germany was somehow implicated.

“If you were to ask me which German bank hadn’t helped its customers go to Mossack Fonseca, I would have to think long and hard to see if a single one came to mind,” said Georg Mascolo, referring to the Panama-based law firm that is at the center of the leaks because it’s where the documents originated. Mascolo proceeded to single out Deutsche Bank and Berenberg bank, the latter of which he said had “especially distinguished itself.” Both institutions promptly denied any wrongdoing. Speaking to the news agency DPA, a spokesman for Berenberg’s Swiss subsidiary insisted there was nothing inherently illegal about dealing with offshore companies. “This is, of course, done in line with legal regulations, but it does require greater due diligence on the part of the banks,” he said, noting that such accounts were “permanently monitored.”

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Sort of funny. Note that this story had been playing out for a few years already.

Data From Panama Law Firm Came From Employee, Not Hackers (Rijock)

Now it’s Panama Leaks: massive amounts of customer data stored on the computers of the country’s principal provider of corporations, Mossack Fonseca, have been stolen and delivered to foreign journalists, who reportedly are planning on releasing it as early as Monday. The data is believed to contain information on Panama companies, and bank accounts, held by foreign government officials, other politically exposed persons (PEPs) and organized crime syndicates. The public release of this information could result in widespread criminal charges against corrupt heads of state and other officials who have banked the proceeds of illegal bribes and kickbacks they have received.

There will be special attention paid to individuals who accepted money from American and British firms to allow them to participate in lucrative business arrangements, as the US and UK both strictly enforce their foreign corruption laws. Mossack Fonseca, already reeling being implicated in a major corruption case in Brazil, in which present or former government officials at the highest level are under criminal investigation, has also been in the news lately due to allegations that senior officials in Malta hold secret banks accounts in Panama, facilitated by the Mossack firm. Investigative reporters are allegedly already to publish the names, and sordid details, of a large number of corrupt PEPs. Some television media are reportedly planning on running stories early this week.

Panama insiders have said that the source of the information was not, as Mossack is reporting, an intrusion by hackers, but an inside job. A former female employee, with access to the data, was allegedly involved in an intimate relationship with a Mossack name partner. The relationship ended badly some time ago, and the employee exacted her revenge by going public with Mossack client lists and related data. The impact of this leak cannot be underestimated; it will seriously undermine global confidence in the ability of Panamanian financial service providers to assist corrupt government officials, and career criminals in hiding their ill-gotten gains, which is the major segment of the client base in such firms. It is too early to know whether dirty money will now seek a different opaque haven to be hidden.

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To further illustrate the point I made yesterday.

Panama Papers Cause Guardian to Collapse into Self-Parody (OG)

You’d be forgiven for thinking, given the above picture, that the Panama Papers had something to do with Vladimir Putin. Maybe he was a kingpin of the whole thing. Maybe he was, at least, among the 12 world leaders implicated in various shady financial practices – along with Petro Poroshenko, the saviour of Ukrainian democracy, and the King of Saudi Arabia (dad of the recent Légion d’Honneur winner). Luke Harding, a bastion of ethical journalism (and not at all a paranoid lunatic), has churned out 2 articles totaling over 5000 words, each using the word “Putin”, almost as often as they use the phrases “allegedly”, “speculation suggests”, “has been described as” and “may have been”.

Neither of his articles mentions by name any of the 12 world leaders, past and present, actually identified in the documents, nor do they mention David Cameron’s dad, who is also in there. No, they focus on a cellist friend of Putin’s, talk about his daughter’s marriage, and include an awful lot of diagrams with big arrows that point at pictures of…Vladimir Putin. This is, apparently, all evidence of…something …I’m not sure what, but it will probably be discussed at length in the “book” Luke Harding is probably planning to publish in a couple of weeks. That’s if the NSA don’t delete it all while he’s typing. The only important, or even true, phrase Harding uses appears at the very top of this article:

…the president’s name does not appear in any of the records…

That’s a minor detail of course, I mean, they have a video: “How to hide $1 billion”. The title screen is, you guessed it, a photo of Putin. Presumably because he is SO GOOD at hiding his billions that, unlike Petro Poroshenko and David Cameron’s dad:

…the president’s name does not appear in any of the records…

So there you go. The Guardian falls into self parody, pasting up a massive picture, a misleading headline and 5000 words (that Harding presumably copied from someone else), at the merest suggestion of a tenuous connection to the Russian president. It’s a bit odd, really.

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While scrambling to delete any and all references. But still, they do have a point. It’s not as if something financed by Soros is even remotely neutral.

China State Paper Sees ‘Powerful Force’ Behind Panama Leak (BBG)

A “powerful force is behind” the leak of more than 11 million documents detailing the offshore accounts of some of the world’s wealthiest people, and the U.S. government stands to gain the most from the revelations, a state-run Chinese newspaper said. An editorial published by the Global Times newspaper Tuesday provided China’s first official reaction to investigations by more than 100 news organizations, detailing overseas holdings of about 140 politicians, public officials and family members, including President Xi Jinping’s brother-in-law. The editorial, which focused on Russian President Vladimir Putin and didn’t mention any of the Chinese examples, assessed the “eye-catching” revelations as a salvo in an East-West ideological struggle, echoing the Kremlin’s response.

“The Western media has taken control of the interpretation each time there has been such a document dump, and Washington has demonstrated particular influence in it,” said the Global Times, which is published by the Communist Party’s flagship People’s Daily. “Information that is negative to the U.S. can always be minimized, while exposure of non-Western leaders, such as Putin, can get extra spin.” The release of the so-called Panama Papers come at an embarrassing time for Xi, who’s requiring party members to give authorities more information about their family wealth to institutionalize his more than three-year-old war on graft. Mentions of the documents were widely scrubbed from China’s heavily censored Internet and news outlets, which have come under increased pressure from Xi to toe the party line.

Links shared on Tencent Holdings’s WeChat messaging service said the “page could not be found.” Attempts to search “Panama Papers” on Baidu’s Google-like search engine returned only a one-line warning that “search results may not comply with relevant laws or regulations.” The Global Times editorial was published only in English.

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Those forces are waiting for TTP and TTiP to be ratified.

The Forces of Globalization Are Sputtering (WSJ)

On the campaign trail, presidential candidates in both parties depict an America under siege from cheap imports, job-stealing globalization or waves of illegal immigration. The reality since the global recession is far more complicated. Across a range of measures, the forces that once pointed to an inexorable internationalization of the world’s economy have slowed, stuttered or swung into reverse. The slowdown points to deeper economic challenges far different from the political alarms. Much of the world is struggling with a sluggishness that is clouding the U.S. outlook, driven by aging demographics, slumping labor productivity and policy makers lacking the tools or the will to pump more life into the global economy. Whatever the causes, signs abound that the forces of globalization have slowed.

Manufacturing jobs in the U.S. declined every year from 1998 to 2009, regardless of whether the overall economy was expanding or in recession. But over the past six years, manufacturing employment has edged up. It’s hardly a renaissance—the U.S. has regained about 1 million manufacturing jobs after losing 8 million since the late 1970s—but it’s a halt to the decline. The U.S. share of global exports fell sharply, especially from 1998 to 2004, but has held steady over the past 12 years at roughly 8.5%. There’s even evidence the trend of illegal immigration in the 1990s and 2000s, when millions of Mexicans crossed the border for the U.S., has stalled or gone into reverse, despite frequent alarms raised by Republican front-runner Donald Trump. The Pew Research Center estimates that since 2007, the flow of illegal immigrants returning to Mexico has been larger than the number entering the U.S.

“The globalization process, which was firing on all cylinders during the 2000s, has stalled over the past six or seven years,” said Benjamin Mandel, global strategist at J.P. Morgan Asset Management and a former New York Fed economist. The trend isn’t specific to the U.S. Globalization has sputtered around the world. From 1992 to 2008, trade climbed to about 30% of total world economic output, from 20%. That climb has halted, and remains at about 30% of GDP in the latest World Bank estimates. If the historical trend between trade growth and GDP growth had continued, global trade would be $1.8 trillion larger, according to estimates from Eric Lascelles, chief U.S. economist of RBC Asset Management. That’s equivalent to an economy the size of Canada or Russia disappearing from global output.

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From the IMF research department.

China Hard Landing Could Trigger Global Market Bloodbath: IMF (Tel.)

Jitters over the health of the Chinese economy could trigger a bloodbath on financial markets if a hard landing materialises, the IMF has warned. The IMF said policy choices in the world’s second largest economy would also have “increasing implications for global financial stability” in the coming years as the country opens up its bond and equity markets. The fund said emerging market economies such as China, India, Brazil and Russia had driven more than half of global growth over the past 15 years. Stronger trade ties and financial linkages meant spillovers from these countries had become “the norm, not the exception”, increasing the risk that future shocks could send powerful reverberations around the globe. The IMF calculated that emerging market spillovers now accounted for a third of the fluctuations seen in equity and currency markets in advanced nations.

Highlighting last summer’s massive stock market sell-off after China devalued its currency, the IMF noted that Chinese growth had an “increasing” and “significant” impact on global equity prices. “The impact of shocks to China’s fundamentals on global financial markets is expected to grow stronger and wider over time,” the Fund said in a pre-released chapter of its Financial Stability report. “Clear and timely communication of its policy decisions, transparency about its policy goals, and strategies consistent with achieving them will, therefore, be essential to ensure against volatile market reactions, which may have broader repercussions.” The IMF also urged policymakers to do more to rein in corporate debt, which it has previously said could see a wave of defaults as the US hikes interest rates.

“Fire sales” of assets by money managers could also amplify emerging market spillovers in a downturn, if mutual funds rushed to sell illiquid assets, the IMF warned. Financial “spillbacks” triggered by policy actions in advanced economies such as tighter monetary policy in the US underscored “the importance of enhanced international macroeconomic and macroprudential policy co-operation”, the IMF said. The Fund issued a separate warning on the $24 trillion life insurance sector. It said herding behaviour created systemic risks that could make firms “too many to fail”. The IMF said the low interest rate environment had encouraged many firms to increase risk taking in order to “resurrect their fortunes”, particularly among smaller and less capitalised firms. “Jointly firms can propagate shocks, if they act similarly,” the IMF said. “They may be ‘too many to fail’,” it warned.

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From the other IMF orifice. She has absolutely nothing. Zilch. Not a word she utters has any meaning.

Lagarde Says Risks to Weak Global Recovery Are Increasing (BBG)

The global recovery is facing growing risks, and frustration with inequality is increasing the lure of protectionism, IMF Managing Director Christine Lagarde said. The world economy’s outlook has dimmed over the last six months, exacerbated by China’s slowdown, lower commodity prices and the risk of financial tightening in many countries, Lagarde said Tuesday in the prepared text of a speech in Frankfurt. The expected passing of the “growth baton” from emerging markets to advanced economies hasn’t occurred, she added. Lagarde, fresh from winning a new five-year term at the fund’s helm, used the opportunity to caution against being drawn to the kinds of forces that have fueled the populism-driven candidacies of Bernie Sanders and Donald Trump in the U.S. presidential election.

While inequality has been declining on a global scale, the perception remains that “the cards are stacked against the common man – and woman – in favor of elites,” said Lagarde, 60. “To some, the answer is to look inward, to somehow unwind these linkages, to close borders and retreat into protectionism,” she said, without naming any politicians. “As history has told us – time and again – this would be a tragic course.” Lagarde’s comments on the global economy add to signs that the IMF will downgrade its growth forecast when it releases its updated World Economic Outlook on April 12. Finance ministers and central bankers from the fund’s 188 member nations will gather later that week in Washington for the IMF’s spring meetings. “The good news is that the recovery continues; we have growth; we are not in a crisis,” Lagarde said. “The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing.”

Lagarde said U.S. growth is flat due partly to the strong dollar, while low investment and high unemployment are weighing on growth in the euro zone. Growth and inflation in Japan have been weaker than expected, she added. China’s transition to a more sustainable economic model involves slower growth, Lagarde said, adding that downturns in Brazil and Russia have been worse than expected and Middle Eastern nations have been hit hard by the decline in oil prices. “Certainly, we have made much progress since the great financial crisis,” Lagarde said. “But because growth has been too low for too long, too many people are simply not feeling it.” The persistent low growth can be “self-reinforcing,” because of negative effects on potential output that can be hard to reverse, she said.

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Beijing is deliberately creating an ever bigger housing bubble. Scary.

Subprime Housing Risks Raise Red Flags In China (WSJ)

China’s efforts to tackle a glut of vacant housing by spurring home lending have triggered a bigger problem: A surge in risky subprime-style loans that is generating alarm among regulators. Home buyers in China normally put down a third of the cost of a new property upfront. But a rapid rise in buyers borrowing for their down payments – an echo of the easy credit that cratered the U.S. housing market and sparked the financial crisis – has prompted authorities to clamp down. Peer-to-peer lenders, who raise money from investors and then lend it out at higher interest rates, made 924 million yuan ($143 million) in down-payment loans in January, more than three times the amount made in July, according to Shanghai-based consultancy Yingcan.

A senior banking executive at one of China’s top four state-owned banks said down-payment loans directly contributed to a recent run-up in housing prices in big cities. “It’s a risky practice that should be contained,” he said. Officials at various levels of government are now stepping on the brakes. The central bank and the housing ministry last month started to crack down on loans enticing home-buyers with “zero-down-payment” slogans. [..] Beijing began easing credit in late 2014 to help cities fill empty apartments — a legacy of a housing-construction boom fueled by a decade of urban population growth and cheap credit. As companies and local governments sag under crippling debt, authorities have seen room for more borrowing among households and have tried to widen the pool of home buyers.

But despite a rise in down-payment loans and lower mortgage barriers for groups such as rural migrant workers, it has proven hard to unleash buying in the right places. Instead, the easing measures and new incentives fed a property frenzy in China’s megacities, with buyers driven by fear of being left behind in a market increasingly out of reach. Shenzhen, where housing prices have soared 57% since last year, according to official data, has tightened down-payment requirements. So has Shanghai, where housing loans more than tripled in January compared with a year earlier. Data on loans used to finance down payments is sketchy, as such financing is a relatively new business. In addition, developers sometimes offer such loans, and banks offer mortgage applicants loans for renovations, taxes or travel that can be channeled toward the down payment, according to property agents. Depending on the housing market, agents say, these loans can attract annual interest rates of up to 24%.

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Until there’s nothing left.

Bond Market ‘Exhausted’ as Kuroda Stimulus Enters Fourth Year (BBG)

Three years since Bank of Japan Governor Haruhiko Kuroda embarked on an unprecedented monetary experiment, yields continue to test new lows even as concern grows that his policies will cripple the world’s second-biggest bond market. Yields have tumbled below zero on maturities up to a decade following the central bank’s surprise decision this year to implement negative interest rates, after unleashing two rounds of quantitative easing since April 4, 2013. As the BOJ’s bond holdings have swelled to one-third of total debt outstanding, the market has begun to seize up amid a dearth of liquidity, causing volatility to soar. Even so, inflation – and inflationary expectations – remain far from Kuroda’s 2% target.

That’s why an overwhelming majority of analysts predict the BOJ will expand stimulus again by July, even while some warn that the technical limits to the asset-purchase program are rapidly approaching. In the BOJ’s latest survey of bond market participants, 41% rated market functioning as “low.” Kuroda said Tuesday the central bank can lower the deposit rate from the current minus 0.1% if needed, and he doesn’t think negative rates will make asset purchases difficult. “The bond market is becoming increasingly exhausted, and increasingly volatile,” said Shuichi Ohsaki at Bank of America Merrill Lynch in Tokyo. “It’s not a properly functioning market anymore. This stimulus can’t go on indefinitely.”

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The achievements of the ‘intelligent’ human species.

Sperm Whales Found Full of Car Parts and Plastics (NatGeo)

Fishing gear and an engine cover are just some of the startling contents found inside the stomachs of sperm whales that recently beached themselves on Germany’s North Sea coast. The 13 sperm whales washed up near the German state of Schleswig-Holstein earlier this year, the latest in a series of whale strandings around the North Sea. So far, more than 30 sperm whales have been found beached since the start of the year in the U.K., the Netherlands, France, Denmark, and Germany. After a necropsy of the whales in Germany, researchers found that four of the giant marine animals had large amounts of plastic waste in their stomachs. The garbage included a nearly 43-foot-long shrimp fishing net, a plastic car engine cover, and the remains of a plastic bucket, according to a press release from Wadden Sea National Park in Schleswig-Holstein.

However, “the marine litter did not directly cause the stranding,” says Ursula Siebert at the University of Veterinary Medicine Hannover, whose team examined the sperm whales. Instead, the researchers suspect that the whales died because the animals accidentally ventured into shallow seas. Male sperm whales normally migrate from their tropical or subtropical breeding grounds to colder waters at higher latitudes. The species is one of the deepest diving animals in the cetacean family, known to plummet as far as 3,280 feet (1,000 meters) in search of squid, its favorite food. The beached whales were all young males between the ages of 10 and 15, and the necropsies revealed that they died of heart failure. The team believes this particular group mistakenly swam into the North Sea, a shallower zone in between the U.K. and Norway. There the whales could not support their own body weights, and their internal organs collapsed.

“It is thought that the sperm whales may have got lost and entered the North Sea (possibly chasing squid), where the sea floor is not deep enough, causing the whales to become disorientated and die,” Danny Groves, a spokesperson for the nonprofit Whale and Dolphin Conservation (WDC), wrote in an email. According to the WDC, whales and dolphins may strand for many reasons, such as excessive noise pollution from ships and drilling surveys or even subtle shifts in Earth’s magnetic field. In addition, pilot whales that beached off the coast of Scotland three years ago showed high levels of toxins from ocean pollution, which scientists linked to stress on their brains that may have caused disorientation.

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The EU-Turket deal is a disgrace on more levels than we can count.

Turkey: The Business Of Refugee Smuggling & Sex Trafficking (ZH)

A detailed report on Syrian women refugees, asylum seekers, and immigrants in Turkey, issued as far back as 2014 by the Association for Human Rights and Solidarity with the Oppressed (known in Turkish as Mazlumder), tells of early and forced marriages, polygamy, sexual harassment, human trafficking, prostitution, and rape that criminals inflicted upon Syrians in Turkey. According to the Mazlumder report, Syrians are sexually exploited by those who take advantage of their destitution. Children, especially girls, suffer most. Evidence, both witnessed and forensic, indicates that in every city where Syrian refugees have settled, prostitution has drastically increased. Young women between the ages of 15 and 20 are most commonly prostituted, but girls as young as thirteen are also exploited.

Secil Erpolat, a lawyer with the Women’s Rights Commission of the Bar Association in the Turkish province of Batman, said that many young Syrian girls are offered between 20 and 50 Turkish liras ($7-$18). Sometimes their clients pay them with food or other goods for which they are desperate. Women who have crossed the border illegally and arrive with no passport are at high risk of being kidnapped and sold as prostitutes or sex slaves. Criminal gangs bring refugees to towns along the border or into the local bus terminals where “refugee smuggling” has become a major source of income. Professional criminals convince parents that their daughters are going to a better life in Turkey. The parents are given 2000-5000 Turkish liras ($700-$1700) as a “bride price” – an enormous sum for a poor Syrian family – to smuggle their daughters across the border.

“Many men in Turkey practice polygamy with Syrian girls or women, even though polygamy is illegal in Turkey,” the lawyer Abdulhalim Yilmaz, head of Mazlumder’s Refugee Commission, told Gatestone Institute. “Some men in Turkey take second or third Syrian wives without even officially registering them. These girls therefore have no legal status in Turkey. Economic deprivation is a major factor in this suffering, but it is also a religious and cultural phenomenon, as early marriage is allowed in the religion.” Syrian women and children in Turkey also experience sexual harassment at work. Those who are able to get jobs earn little – perhaps enough to eat, but they work long and hard for that little. They are also subjected to whatever others choose to do to them as they work those long hours.

[..] The organization End Child Prostitution, Child Pornography and Trafficking of Children for Sexual Purposes (ECPAT) has produced a detailed report on the “Status of action against commercial sexual exploitation of children: Turkey.” ECPAT’s report cites, from the 2014 Global Slavery Index, estimates that the incidence of slavery in Turkey is the highest in Europe, due in no small measure to the prevalence of trafficking for sexual exploitation and early marriage.

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The problem merely shifts.

Italy Pleads For Greek-Style Push To Return Its Migrants (FT)

Italy is pleading for EU help to ramp up the deportation of migrants arriving on its southern shores, warning that the bloc’s immigration system is at risk of collapse without a more aggressive policy on so-called returns. In an interview with the FT, Angelino Alfano, Italy’s interior minister, says the EU should move to secure deals with African nations, which are the source of the vast majority of migrants arriving in Italy, offering economic aid in exchange for taking back their citizens and preventing new flows. His comments come as the EU enacts a scheme with Turkey in which thousands of Middle Eastern refugees will be sent back across the Aegean Sea from Greece in exchange for up to €6bn in EU aid for Ankara. A first group of 135 were returned to Turkey on Monday.

“Europe was able to find the resources when it was urgent – I am referring to Turkey. It’s a matter of political leadership,” Mr Alfano said. “If returns don’t work, the whole Juncker migration agenda will fail,” he said. Mr Alfano’s request reflects renewed nervousness in Rome about the migration crisis following an 80 per cent spike in the number of arrivals to Italy across the central Mediterranean Sea in the first quarter of this year compared to 2015. If that increase holds through the warmer spring and summer months, it would smash the record 170,000 migrants who arrived in Italy in 2014, straining resources and creating a political problem for the centre-left government led by Matteo Renzi. As the Greece plan goes into action, there are worries in Rome that it may compound problems by encouraging Middle Eastern migrants to switch routes and attempt to enter the EU through Italy, boosting the numbers even further.

“If Syrians don’t want to stay in Turkey but want to try the trip to Europe, they will go around and try to get here from Libya,” Mr Alfano said. “We still don’t have any evidence that this is happening, but we are monitoring.” Italy has held talks with Albania about containing a possible surge in flows through the Balkan nation. Mr Alfano also expressed hope that the recent, if wobbly, establishment of a national unity government in Libya could lead to a crackdown against migrant smugglers there. For those who do arrive, Italian officials are hoping that an EU plan to relocate thousands of refugees across its 28 member states will relieve some pressure. So far, only about 500 migrants have been moved from Italy under the plan – “apartment building numbers” – says Mr Alfano, derisively.

Italy last year deported 15,000 people, or about 10 per cent of all arrivals. Officials believe higher figures are essential to alleviate the country’s burden, even if mass returns could trigger concerns about possible violations of human rights and international law. “Irregular [migrants] have to be kept in closed camps from where they cannot escape. So how many tens of thousands of people can you keep, year after year? Without returns, either you organise real prisons, or it’s obvious that the system will collapse,” Mr Alfano said. “It doesn’t take a prophet to glimpse the future”.

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Yesterday’s deportations will prove to be mainly symbolic. From here on in the problems start.

So The Greece Deportations Are Going ‘Smoothly’? Take A Closer Look (G.)

Today had been declared the first day that migrants and refugees would be deported from Greece within the framework of the EU-Turkey deal, and European authorities seemed determined not to miss the date. So as of Sunday, Greek police, along with the EU border agency Frontex, organised a large-scale operation to ensure the smooth handling of today’s returns from the islands of Chios and Lesbos. The operation was initially deemed a success, with reports being limited to the boats and their occupants, which offered some digestible photo ops. There is plenty of evidence, though, that suggests that it has been no more than a media-savvy gesture on behalf of the European commission.

Officials from Frontex clarified that the boats carried mostly Pakistanis, Bangladeshis, Afghans and Moroccans who were going to be deported to Turkey prior to the deal or didn’t request asylum. There were only two Syrians among them who appear not to have requested international protection. Indeed authorities appear to have rushed to identify such people so they could be available for today’s return. Termed “easy cases” by Frontex spokeswoman Eva Moncure, they are perfect material for today’s photo op. As it turns out, more than 90% of people arriving in Greek islands since 20 March – when the EU-Turkey deal was enacted – have opted for asylum, thus complicating their return under the arrangement. It is no surprise then that no further dates have been announced for future deportations.

The first day of deportations has been met with affirmative statements by credible international organisations, including the UN High Commissioner for Refugees (UNHCR), who confirmed that all procedures were regular and rights of deportees were observed. Everything is smooth and tidy, it seems. But this is one version of the story only. There is a second where things have gone less smoothly. Activist lawyers’ accounts and journalist reports from the islands raise the question of whether refugees have been given sufficient time and access to asylum procedures. It appears that many of them do not yet understand the content of the deal or why they have been restricted, and there has been a last-minute rush for asylum claims among the people who are possible deportees. It is also unclear how Turkey plans to handle returnees, how they will be received, and whether they will be able to receive the protection that was previously offered to them there.

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Mar 022016
 
 March 2, 2016  Posted by at 10:21 am Finance Tagged with: , , , , , , , , , ,  3 Responses »
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Christopher Helin Flint auto, Ghirardelli Square, San Francisco 1924

China To Lay Off 5 To 6 Million Workers (Reuters)
Deflation Defeats Impotent Central Banks (A. Gary Shilling)
Smells Like Subprime (BBG)
China Credit Outlook Cut to Negative by Moody’s (BBG)
China’s Secret Weapon: Used Car Salesmen (FT)
China Reserve Ratio Cut ‘No Signal Of Impending Large-Scale Stimulus’ (Reuters)
Debts Rise At China’s Big Steel Mills, Consumption Falls (Reuters)
Natural Gas Prices Plunge To 17-Year Lows (CNBC)
Europe’s Biggest Oil Hub Fills as Ship Queue at Seven-Year High (BBG)
UAE Says Oil Collapse Will Force All Producers to Cap Volumes (BBG)
Negative Rates … Negative Outcomes (Corrigan)
Trumpocalypse Now (Guardian)
Euro Depression Is ‘Deliberate’ EU Choice, Says Mervyn King (Telegraph)
Why Austria’s Asylum Cap Is So Controversial (Economist)
EU Nations Urged To Lift Border Checks To Save Passport-Free Zone (Guardian)
Rights Groups Accuse France Of Brutality In Calais Eviction (AP)
Greece Seeks EU Aid For 100,000 Refugees (AFP)

Big risk for Xi. He must be desperate.

China To Lay Off 5 To 6 Million Workers (Reuters)

China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution, two reliable sources said, Beijing’s boldest retrenchment program in almost two decades. China’s leadership, obsessed with maintaining stability and making sure redundancies do not lead to unrest, will spend nearly 150 billion yuan ($23 billion) to cover layoffs in just the coal and steel sectors in the next 2-3 years. The overall figure is likely to rise as closures spread to other industries and even more funding will be required to handle the debt left behind by “zombie” state firms. The term refers to companies that have shut down some of their operations but keep staff on their rolls since local governments are worried about the social and economic impact of bankruptcies and unemployment.

Shutting down “zombie firms” has been identified as one of the government’s priorities this year, with China’s Premier Li Keqiang promising in December that they would soon “go under the knife”.. The government plans to lay off five million workers in industries suffering from a supply glut, one source with ties to the leadership said. A second source with leadership ties put the number of layoffs at six million. Both sources requested anonymity because they were not authorized to speak to media about the politically sensitive subject for fear of sparking social unrest. The ministry of industry did not immediately respond when asked for comment on the reports. The hugely inefficient state sector employed around 37 million people in 2013 and accounts for about 40% of the country’s industrial output and nearly half of its bank lending.

It is China’s most significant nationwide retrenchment since the restructuring of state-owned enterprises from 1998 to 2003 led to around 28 million redundancies and cost the central government about 73.1 billion yuan ($11.2 billion) in resettlement funds. [..] China aims to cut capacity gluts in as many as seven sectors, including cement, glassmaking and shipbuilding, but the oversupplied solar power industry is likely to be spared any large-scale restructuring because it still has growth potential, the first source said. The government has already drawn up plans to cut as much as 150 million tonnes of crude steel capacity and 500 million tonnes of surplus coal production in the next three to five years. It has earmarked 100 billion yuan in central government funds to deal directly with the layoffs from steel and coal over the next two years, vice-industry minister Feng Fei said last week.

The Ministry of Finance said in January it would also collect 46 billion yuan from surcharges on coal-fired power over the coming three years in order to resettle workers. In addition, an assortment of local government matching funds will also be made available. However, the funds currently being offered will do little to resolve the problems of debts held by zombie firms, which could overwhelm local banks if they are not handled correctly. “They have proposed this dedicated fund only to pay the workers, but there is no money for the bad debts, and if the bad debts are too big the banks will have problems and there will be panic,” said Xu Zhongbo, head of Beijing Metal Consulting, who advises Chinese steel mills.

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Nothing they could ever do. Deflation must and will have its day.

Deflation Defeats Impotent Central Banks (A. Gary Shilling)

Central banks are deadly fearful of deflation. That’s why the Federal Reserve, the European Central Bank, the Bank of Canada, the Bank of Japan and Sweden’s Riksbank, among others, have 2% inflation targets. They don’t love rising prices, but they worry about the consequences of a general decline in consumer prices, so they want a firebreak. Unfortunately, they seem powerless to meet their targets in the current economic environment. The guardians of monetary policy are riveted by Japan, where consumer prices have declined in 48 of the last 83 quarters. This pattern of deflation long ago convinced Japanese buyers to hold off purchases in anticipation of lower prices. But the result is excess inventories and too much productive capacity, which force prices even lower.

That confirms expectations, resulting in yet more buyer restraint. The result of this deflationary spiral has been a miserable economy with an average growth in real GDP of just 0.8% at annual rates since the beginning of 1994. Central banks also fret that in a deflationary environment, debt burdens remain fixed in nominal terms, but the ability to service them drops along with falling nominal incomes and waning corporate cash flows. So bankruptcies leap, while borrowing, consumer spending and capital investment all weaken.

As I argued on Monday, deflation remains a clear and present danger. Worryingly, the remedies central bankers are using aren’t working. First, in reaction to the financial crisis, they knocked their short-term reference rates down to essentially zero, and bailed out their stricken banks and other financial institutions. That may have forestalled financial collapse but it did little to stimulate borrowing, spending, capital investment and economic activity. Creditworthy borrowers already had ample liquidity and few attractive spending and investment outlets; slashing borrowing costs to record lows stimulated asset prices such as equities, with little economic benefit.

Furthermore, banks were too scared to lend. And as they resisted attempts to break them up and eliminate the too-big-to-fail problem, regulators bereaved them of profitable activities such as proprietary trading and building and selling complex derivatives. That forced them back toward less lucrative traditional spread lending – borrowing short-term money cheaply and lending it for longer at a profit – just as the shrinking gap between short- and long-term funds made that business even less attractive. With the amount of capital banks are obliged to set aside against their trading activities also leaping, they’re now regulated to such an extent that many of them probably wish they had been broken up.

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And Beijing claims Kyle Bass is wrong?

Smells Like Subprime (BBG)

Chinese bankers often pride themselves on having studied in the U.S. or the U.K and true to form, they’re bringing home a lot of the intricate financing that helped people overseas get loans for homes, cars and education. But these financiers are taking creative structures one step further.On Monday, Bloomberg News reported that China will allow domestic banks to issue as much as 50 billion yuan ($7.6 billion) of asset-backed securities that would be paid back using the proceeds from nonperforming loans. (Yes, you read that correctly.) The structure they’re employing is similar to the method that was used to repackage subprime mortgages in the U.S. ahead of the global financial crisis. But when bankers in America were bundling those low-doc mortgages into AAA-rated bonds, they still expected most of the loans would be repaid.

In this case, the debt has already gone bad. Considering hardly any Chinese asset-backed securities have ever received a less than AA score from a local rating company to date, chances are these ones will be awarded the same grade. Of course, investors buying these bonds should be aware they’re backed with debt that’s already soured, regardless of its credit score. Yet, the move is worrying because it’s the latest in a string of revivals in China of dangerous structures that were common in the West before being all but abandoned after 2008. Many of the instruments are helping banks disguise or unload their exposure to troubled companies in the same way issuance of asset-backed securities helped U.S. and British lenders mask their exposure to souring home payments as loans became delinquent.

Ironically, China had pretty much banned asset-backed securities until 2013 because of what happened during the credit crisis. Since authorities began allowing them again, they’ve spread like wildfire. Official data indicate that 593 billion yuan of ABS were sold last year, 79% more than in 2014. Less comprehensive Chinabond data show some 678 billion yuan being issued over the past two years. The first quota of 50 billion yuan is just a test. If there’s enough demand you can bet there will be plenty more of these repackaged bad-loan bonds floating around China in coming years. The amount of debt classed as nonperforming at Chinese commercial banks jumped 51% from a year earlier to 1.27 trillion yuan as of Dec. 31, the highest since June 2006, data from the China Banking Regulatory Commission showed last month.

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CDS look very ugly.

China Credit Outlook Cut to Negative by Moody’s (BBG)

China’s credit-rating outlook was lowered to negative from stable at Moody’s Investors Service, which highlighted the country’s surging debt burden and questioned the government’s ability to enact reforms just days before leaders gather to approve a five-year road map for the economy. The government’s financial strength may come under pressure if it takes on liabilities from troubled state-owned companies, while capital outflows have limited policy makers’ scope to stimulate the weakest economy in a quarter century, the ratings company said in a statement on Wednesday. State intervention in equity and foreign-exchange markets has heightened uncertainty about the leadership’s commitment to reform, Moody’s said.

While markets shrugged off the outlook cut on Wednesday, it highlights concern among global investors that the ruling Communist Party will struggle to overhaul Asia’s largest economy at a time when capital is flowing out of the country and debt levels have climbed to an unprecedented 247% of GDP. Chinese leaders will begin nearly two weeks of policy meetings on Saturday to map out how to tackle the nation’s economic challenges and meet the government’s goal of doubling per-capita income by 2020. “The government’s ability to absorb shocks has diminished and we want to signal this in the negative outlook,” Marie Diron, a senior vice president at Moody’s, said in an interview on Bloomberg Television. Authorities “have stepped backward in their reform steps and so that is creating some uncertainty.”

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Growth market. Next up: scrapyards.

China’s Secret Weapon: Used Car Salesmen (FT)

You have probably read, in the Financial Times and elsewhere, that China is the world’s largest car market. It is not. It is the world’s largest new car market, with sales of 21.1m units last year compared with 17.4m in the US. When used cars are included, the US auto market swells to more than 40m units, against less than 30m total passenger car sales in China. In value terms, the gap between the two markets is even larger. In 2014, the overall value of US car sales was almost $1.2tn, more than twice as large as China’s $470bn. This is not surprising, considering that two-thirds of cars on Chinese roads are less than five years old and 80% of all buyers are first-time drivers. The latter fact explains why crossing an intersection in China can be a harrowing experience for pedestrians.

Put another way, an industry that most Americans, Europeans and Japanese have grown up with and now take for granted does not yet even exist in China. Dismiss a shady character as a “used car salesman” and most Chinese people will not understand the reference. As Chinese leaders gather at their annual parliamentary session later this week, it is worth bearing in mind that they are doing so in a country where one cannot very easily buy a used car. That fact should reassure Chinese politicians and multinational executives worried about the pace of growth in the world’s second-largest economy, which will be a topic of much discussion at the National People’s Congress.

Government officials insist that the rising “new economy” will balance out the declining “old economy”, allowing the country to grow at an average rate of 6.5% through 2020. The creation of entirely new industries will further support growth. The inevitable rise of what will soon be the world’s largest used car market is one such example. While its emergence will initially cannibalise some new car sales — primarily those of cheap domestic brands — the potential for growth is huge. In most developed auto markets, there are at least two used car sales for every one new car sale. In China the ratio is inverted, with roughly three new car transactions for every used car sold.

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Just a signal of panic.

China Reserve Ratio Cut ‘No Signal Of Impending Large-Scale Stimulus’ (Reuters)

China’s move to cut banks’ reserve requirement ratio (RRR) indicates a slight easing bias in China’s “prudent” monetary policy, but that is by no means a signal of any coming large-scale stimulus, the official Xinhua news agency said in a commentary late on Tuesday. The Xinhua commentary follows rising market expectations that China could implement a version of the massive stimulus it adopted during the global financial crisis, launching in late 2008 a 4 trillion yuan ($610 billion)stimulus package to boost the economy. The news agency said strong stimulus was not needed because China still had monetary policy tools available and China’s economy was growing at a reasonable rate, with no signs of chaos or crisis in the global economy. Xinhua stated that because China would stick to its prudent monetary policy, there would be no changes in the way the government adjusted liquidity, which would be kept at a reasonable and flexible level, it said.

That meant China’s lending and total social financing would grow at a steady and reasonable rate, Xinhua noted. Xinhua’s view was echoed by state-owned People’s Daily, which reported on Wednesday, citing economists, that the RRR cut was not stimulus, but only reflected increasing policy flexibility aimed at supporting economic development. Late on Monday, the People’s Bank of China announced a cut in the amount of cash that banks must hold as reserves – the reserve ratio requirement (RRR) – by 50 basis points. It frees up an estimated $100 billion in cash for new lending. Hong Hao at BOCOM International said the RRR cut was largely liquidity neutral, because the move was intended to offset the decline in China’s foreign currency reserves and to accommodate more than 1 trillion yuan of open market operations facilities due this week.

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So they can’t go broke, right?!

Debts Rise At China’s Big Steel Mills, Consumption Falls (Reuters)

China’s major steel mills added to their debt pile in 2015 while consumption of steel products fell for the first time in two decades, a senior official said on Wednesday, adding to the industry’s difficulties as it tries to tackle a crippling glut. The debt ratio of major steel mills rose 1.6 %age points to 70.1% from a year ago, taking the big mills’ debt to 3.27 trillion yuan ($499 billion), Li Xinchuang, the vice secretary general of the China Iron & Steel Association (CISA), told a conference. At the same time, steel product consumption in China fell 5.4% to 664 million tonnes in 2015 from a year ago, the first drop since 1996, said Li, who is also head of the China Metallurgical Industry Planning and Research Institute.

China is trying to rein in its bloated steel sector, and aims to cut crude steel capacity by 100 million to 150 million tonnes within the next five years, as well as ban new steel projects and eliminate so-called “zombie” mills. However, slower demand and rising debt will put further pressure on the industry, with prices already at multi-year lows. China’s major steel mills produced a combined 601 million tonnes of steel last year, accounting for nearly three-quarters of the country’s total output, Li said. CISA earlier said the country’s total annual crude steel capacity now stands at 1.2 billion tonnes. Total production reached 803.8 million tonnes last year, down 2.3%, the first drop since 1981. The drive to cut industrial capacity will force China to lay off probably 1.8 million workers from coal and steel sectors, and the central government will allocate 100 billion yuan to deal with job losses and tackle debt.

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“..Australian LNG production is expected to grow 50% in the five years through to 2020..”

Natural Gas Prices Plunge To 17-Year Lows (CNBC)

Natural gas prices have crashed to 17-year-lows in the past week, underscoring burgeoning supply in the global market just as U.S. exports its first ever shale gas cargo. On Monday, natural gas prices on the New York Mercantile Exchange settled 4.5% lower to their lowest level since 1999 after U.S. weather forecasts signaled warmer weather in the weeks ahead, curbing demand for natural gas used for heating. The decline brought February losses in natural gas to 26%. Prices recovered on Tuesday but the outlook remains depressed. Japan, the world’s largest importer of natural gas, is restarting its nuclear reactors six years after the 2011 Fukushima disaster, with three out of 43 nuclear reactors brought back online since August and more expected to come.

Japan is likely to bring back more reactors online, which will make the country less dependent on LNG for electricity generation. In January, shipments of LNG into Japan fell the most in more than six years, according to Bloomberg calculations. This does not bode well for Australia, which has pumped more than $160 billion in LNG investments just before the commodities rout that has taken oil prices down 70% since the summer of 2014. Australian LNG production is expected to grow 50% in the five years through to 2020 even as certain producers cut capital expenditures and reduce spending on upstream activities, said Fitch Group unit BMI Research in a note last week.

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“..people will be filling up their “swimming pools” with it this year.”

Europe’s Biggest Oil Hub Fills as Ship Queue at Seven-Year High (BBG)

The queue of ships waiting outside Europe’s biggest port and oil-trading hub of Rotterdam has grown to the longest in seven years as a global supply glut fills storage capacity. As many as 50 oil tankers, twice as many as normal, are waiting outside Rotterdam because storage sites are almost full, the port’s spokesman Tie Schellekens said by phone on Tuesday. “This is a clear sign of the oversupply filling up storage to the brim,” Gerrit Zambo, an oil trader at Bayerische Landesbank in Munich, said by phone. “People are preferring to store oil rather than cut production. These are bearish signs.” The world is so awash with oil that BP CEO Bob Dudley said last month people will be filling up their “swimming pools” with it this year.

Traders are taking advantage of a market contango, where forward prices are higher than current prices, by buying oil cheap, storing it and selling the commodity later. As onshore storage fills up, companies could start stockpiling at sea in a repeat of a strategy last seen in 2008 and 2009. Crude oil in storage tanks in Rotterdam stood at 51.3 million barrels on Feb. 19, the highest for the time of year in data starting in 2013, according to Genscape, which monitors inventories. Royal Vopak NV, the world’s largest oil-storage company, last week reported a fourth-quarter occupancy rate of 96% at its 11 terminals in the Netherlands compared with 85% a year earlier. The situation in Rotterdam mirrors that in the biggest U.S. storage hub of Cushing in Oklahoma, where stockpiles are at a record high.

“In Cushing and probably Rotterdam storage is filling up very quickly,” said Giovanni Staunovo at UBS in Zurich, Switzerland. “In China, given high oil imports, there are too many ships and the infrastructure seems not be able to handle that.” Saudi Arabia, the world’s biggest oil exporter, said last month it won’t cut production to ease global oversupply, while Iran has pledged to increase output after sanctions were lifted in January. Still, oil climbed on Tuesday from the highest close in more than seven weeks on speculation that monetary stimulus in China could help revive flagging economic growth in the world’s second-biggest fuel consumer.

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It will bankrupt them first.

UAE Says Oil Collapse Will Force All Producers to Cap Volumes (BBG)

The oil-price collapse will compel all producers to freeze output and no early OPEC meeting can take place without such a move, the United Arab Emirates’ energy minister said. “This is the reality,” Suhail Al Mazrouei said Tuesday in Abu Dhabi. “Current prices will force everyone to freeze production; stubbornness doesn’t make sense.” Saudi Arabia – the world’s largest crude exporter – Russia, Venezuela and Qatar have proposed that producers cap production at January levels to bolster prices that have tumbled almost 70% in two years. OPEC member Iran, which is ramping up output following the removal of sanctions in January, has said the plan is “ridiculous” and saddles it with “unrealistic demands.”

Venezuela is among members of the Organization of Petroleum Exporting Countries to call for a meeting of oil producers this month, while Saudi Arabian Oil Minister Ali al-Naimi has said he hopes for such a gathering. The group’s next scheduled meeting is in June. Mazrouei said he hasn’t received an invitation for an early meeting and a summit won’t be necessary if producers don’t agree in advance to freeze output. That runs counter to Iran’s plans to increase volumes by 1 million barrels a day this year. “The idea of bringing a lot of production in a short period is not practical,” Mazrouei said.

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Laws of nature.

Negative Rates … Negative Outcomes (Corrigan)

There has been much head-scratching of late as to why, with interest rates lower than they have been since the Universe first exploded out of the Void, businesses are not undertaking any where near as much investment as that hoped for beforehand by the academic cabal whose ‘effective demand’ and ‘transmission channel’ fixations have helped drive rates to today’s mind-boggling levels. This is obviously a complex topic in which there are many different factors at work – not the least of which is that the prevalence of overly-low interest rates for much of the recent past has meant that all too much of such investment as is now desired has not only already been done, but done in what has turned out to be so misguided a fashion, that there is less appetite – as well as fewer means, in many cases – to undertake much more of it today.

If the cure for higher prices – as the saying in commodity markets goes – is higher prices, then the cause of lower rates is almost certainly lower rates! Be that as it may, on a more fundamental level, it might also be possible to tease out at least one aspect of the answer to the conundrum with the aid of a little straightforward logic, as we shall now attempt to do here. In theory, positive interest rates reflect the primal truth that goods fit for our enjoyment today are worth more to their potential consumer than those same goods which are only available tomorrow. Moreover, since producer goods are otherwise inedible, unwearable, uninhabitable, etc., in their present form, they only derive their value in respect of their quality of being innate consumer goods-to-be.

Hence, the means of producing the day’s goods for some future date are always to be discounted back using that same ratio (which is none other than the natural rate) as the one which prevails between consumables-now and consumables-then. Doing so gives us a positive IRR (or, if you prefer, assuring that NPV>0) for the process. Here it goes without saying that since the natural rate is inherently unobservable, the market interest rate will be used in its place – an unavoidable substitution which demands that this latter quantity be subject to as few falsifications as possible (a vexed topic suitable for a forthcoming, much deeper treatment).

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Oh, wait, Drumpfocalypse.

Trumpocalypse Now (Guardian)

There will be those in the Republican and conservative establishment who will try to spin the Super Tuesday results. Some among the GOP chattering classes will tell you that Trump didn’t get the knock-out punch he wanted – that there is still a chance to restore order. Don’t believe it. The numbers make it clear that, for the Republican party, it’s Trumpocalypse Now. While Ted Cruz won his home state of Texas as well as Oklahoma, and Rubio ran him close in Virginia and actually managed to win Minnesota, Trump dominated elsewhere. His success extended from Massachusetts to Georgia to Alabama to Tennessee to Oklahoma. He won in Ted Cruz’s south, and he won in the north-east, where a more establishment-friendly candidate like Marco Rubio was supposed to prevail.

Trump is winning with men and women, moderates and conservatives, with the young and the old. Trump is winning despite a weekend of unforced errors – after failing to repudiate former Klu Klux Klan Grand Wizard David Duke. Trump is winning even after taking political napalm from Marco Rubio since last week’s debate – with Rubio ridiculing his rival on the trail for days. Trump is winning despite the fact that the Republican speaker of the House and majority whip in the Senate both criticized him this week. He is winning in spite of the fact that almost every big name Republican officer-holder and mega-donor is lined up behind his opponents. The race is not technically over. While Trump will win the lion’s share of delegates tonight, both Cruz and Rubio will pick up delegates and spend the next couple of weeks trying to convince voters and donors that they can stop the frontrunner – that they have a path to the nomination.

Whether or not either of these men can really achieve that at this point – and I remain highly skeptical, despite Cruz’s two-state win – the day of reckoning for the Republican party has arrived. Whatever happens, what neither Cruz nor Rubio nor anyone else can do is to stop the forces that Trump’s candidacy has unleashed. It’s no longer possible to say the Republican party is a conservative party. You can’t even say the Republican party’s base is conservative. It appears that a new, populist-nationalist wing has wrested control of the of the GOP away from its familiar constituency. This is no longer the party of William F Buckley and Jack Kemp. It’s now the party of Pat Buchanan and Ross Perot.

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“I never imagined that we would ever again in an industrialised country have a depression deeper than the United States experienced in the 1930s and that’s what’s happened in Greece.”

Euro Depression Is ‘Deliberate’ EU Choice, Says Mervyn King (Telegraph)

Europe’s deep economic malaise is the result of “deliberate” policy choices made by EU elites, according to the former governor of the Bank of England. Lord Mervyn King continued his scathing assault on Europe’s economic and monetary union, having predicted the beleaguered currency zone will need to be dismantled to free its weakest members from unremitting austerity and record levels of unemployment. Speaking at the launch of his new book, Lord King said he could never have envisaged an economic collapse of the depths of the 1930s returning to Europe’s shores in the modern age. But the fate of Greece since 2009 – which has suffered a contraction eclipsing the US depression in the inter-war years – was an “appalling” example of economic policy failure, he told an audience at the London School of Economics.

“In the euro area, the countries in the periphery have nothing at all to offset austerity. They are simply being asked to cut total spending without any form of demand to compensate. I think that is a serious problem. “I never imagined that we would ever again in an industrialised country have a depression deeper than the United States experienced in the 1930s and that’s what’s happened in Greece. “It is appalling and it has happened almost as a deliberate act of policy which makes it even worse”. Lord King – who spent a decade fighting the worst financial crisis in history at the Bank of England – has said the weakest eurozone members face little choice but to return to their national currencies as “the only way to plot a route back to economic growth and full employment”.

“The long-term benefits outweigh the short-term costs,” he writes in The End of Alchemy. The former Bank governor has said popular disillusion with EU economic policies are likely to lead to disintegration of the single currency rather than a move towards “completing” monetary union. Two of the eurozone’s debtor nations – Ireland and Spain – are currently locked in electoral stalemate after their pro-bail-out governments failed to win the backing of voters. But the European Commission has defended itself against claims that punishing austerity measures have made incumbent European regimes unelectable, arguing that Brussels’ economic policy represents a “virtuous triangle” of austerity, structural reforms and investment.

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Nobody cares about the laws they signed up for.

Why Austria’s Asylum Cap Is So Controversial (Economist)

Europe is divided on how to handle the largest number of refugees since the second world war. Still, Austria’s move to cap asylum claims at 80 per day at its southern border and limit the daily number of people travelling through Austria to seek asylum in Germany to 3,200 has sparked outrage. After Austria, which lies on the migrant route from the Balkans into Germany, announced its plan, Dimitris Avramopoulos, European Commissioner for migration, home affairs and citizenship, wrote to Austria’s interior minister to protest. The move, he said, was “plainly incompatible” with EU law. The minister replied, on television: “they have their legal adviser and I have legal advisers.” The Geneva Convention and the EU Charter of Fundamental Rights clearly state that asylum is a right.

Human-rights activists argue that a cap runs counter to the spirit of these texts; lawyers know that, as fundamental as they are, rights are never absolute. But Austria would seem to be flouting some EU directives. One (which was voted for by Austria) says that asylum applications must be officially registered (that is, given a number) no more than ten days after they have been lodged; a daily limit would seem to make following that difficult. Last year, around 700,000 migrants entered Austria and around 90,000 applied for asylum. According to another rule, refugees are supposed to apply for asylum in the first “safe country” they are in, rather than moving on to another. EU rules have been woefully stretched by Europe’s immigration crisis already of course. In 2011, European judges criticised Greece for failing to register asylum applications at the border.

All applications, they said, were being made on one day a week at one police station in Athens. More recently, the European Commission criticised Greece for not being able to control its border and letting people hike up north. In 2011, Italy issued thousands of temporary residency permits, which allow immigrants to travel around Europe, to Tunisians who had arrived on its shores. In response, France closed its border with Italy. No action was taken. Mr Avramopoulos is adamant that Austria’s measures are unlawful, but it is not clear what he intends to do about it. The European Commission’s legal services are building up their case but judges might never hear it. Further angry exchanges seem more likely than legal action. Meanwhile, Austria’s move has led to border slowdowns for migrants across the Balkans. EU leaders have announced they will hold a summit in early March with Turkey to attempt to seek fresh solutions to the crisis.

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Never mind. Schengen’s long dead.

EU Nations Urged To Lift Border Checks To Save Passport-Free Zone (Guardian)

European Union countries are being urged to lift internal border controls before the end of the year, to save the “crowning achievement” of the passport-free travel zone from total collapse, according to a draft report by the European commission. Walls, fences and border checks have returned across Europe as the EU struggles to cope with the biggest inflow of refugees since the end of the second world war. Since September 2015, eight countries in the 26-nation passport-free Schengen zone have re-instated border checks. These controls “place into question the proper functioning of the Schengen area of free movement”, according to the draft report seen by the Guardian, which will be published on Friday. “It is now time for member states to pull together in the common interest to safeguard one of the union’s crowning achievements.”

Separately, the European commissioner for humanitarian aid is expected to announce on Wednesday that €700m (£544m) will be spent over three years in helping refugees in the western Balkans. Much of the money is destined for Greece, as EU leaders scramble to help Athens deal with its own crisis. 24,000 refugees are in need of permanent shelter and 2,000 people are arriving on Greek shores each day. EC president Donald Tusk has described helping Greece as “a test of our Europeanness”. The passport-free travel zone, which stretches from Iceland to Greece but does not include the UK or Ireland, has been under unprecedented pressure; its collapse could unravel decades of European integration. The commission wants member states to lift border controls “as quickly as possible” and with “a clear target date of November 2016”. But Brussels also wants tighter control of the EU’s external border and will repeat warnings that Greece could be kicked out of Schengen if it fails to improve border management by May.

[..] Greece is under growing pressure to hand over management of its borders to the EU, as it struggles to cope with the numbers. According to this latest plan, EU authorities will carry out an inspection of Greece’s borders in mid April to determine whether controls are adequate, with a final decision on Greece’s place in Schengen to be taken in May. The EU executive also reaffirms its intention to overhaul rules governing asylum claims. Under the current rules, known as the Dublin system, asylum seekers have to lodge their claim in the first country they enter. The Dublin regime was effectively finished last year when the chancellor, Angela Merkel, opened Germany’s borders to any Syrian who wanted to claim asylum there, regardless of where they arrived in the EU. In mid-March the commission will set out a list of options for reforming EU asylum policy. The favoured idea is a permanent system of relocation, where refugees are shared out around the union, depending on the wealth and size of a country.

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Second hand citizens.

Rights Groups Accuse France Of Brutality In Calais Eviction (AP)

More than a dozen humanitarian organizations on Tuesday accused authorities of brutally evicting migrants from their makeshift dwellings in a sprawling camp in northern France, as fiery protests of the demolition continued. Thousands of migrants fleeing war and misery in their homelands use the port city of Calais as a springboard to try to get to Britain on the other side of the English Channel. However, authorities are moving to cut short that dream by closing a large swath of the slum camp in the port city of Calais. In the stinging accusation at the close of the second day of a state-ordered mass eviction and demolition operation, the organizations charged that authorities have failed to respect their promise of a humane and progressive operation based on persuading migrants to vacate their tents and tarp-covered homes.

“Refugees, under threats and disinformation, were given one hour to 10 minutes to leave their homes,” a statement said. Police pulled out some who refused, making arrests in certain cases, while others were not allowed to gather their belongings or identity papers, the statement charged. Migrants and pro-migrant activists protested against the eviction Tuesday, some climbing onto shanty rooftops to briefly stall the tear-down, and others by starting a night fire. Tents and tarp-covered lean-tos were also set afire on Monday and earlier Tuesday. The protesting organizations alleged that police aimed flash-balls at the roof protesters, then clubbed them and made some arrests. Tear gas, water cannons and other tactics have been used excessively, the statement charged.

Organizations respected for their humanitarian work with migrants, such as Auberge des Migrants (Migrants’ Shelter), GISTI and Secours Catholique were among the 14 who signed the list of charges. The mass evictions from the southern sector of the camp were announced Feb. 12 with promises by Interior Minister Bernard Cazeneuve that there would be no brutality. However, the Monday start of operations came as a surprise. The regional prefecture in charge of the demolition says the hundreds of police present are needed to protect workers in the tear-down and state employees advising migrants of their options. France’s government has offered to relocate uprooted migrants into heated containers nearby or to centers around France where they can decide whether to apply for asylum. Officials have blamed activists from the group No Borders for the ongoing unrest. But many migrants resist French offers of help, afraid of hurting their chances of reaching Britain.

Officials say the evictions concern 800-1,000 migrants, but organizations working in the camp say the real number is more than 3,000.

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Crazy they even have to ask.

Greece Seeks EU Aid For 100,000 Refugees (AFP)

Greece has asked the EU for €480 million ($534 million) in emergency funds to help shelter 100,000 refugees, the government said Tuesday, warning that the migrant influx threatened to overwhelm its crisis-hit resources. “Greece has submitted an emergency plan to the European Commission .. corresponding to around 100,000 refugees,” government spokeswoman Olga Gerovassili told reporters. “We cannot bear the strain of all the refugees coming here… these are temporary measures, there needs to be a permanent solution on where the refugees will be relocated,” she added. “Greece has made it clear that it will use every diplomatic means available to find the best possible solution,” Gerovassili said.

With Austria and Balkan states capping the numbers of migrants entering their soil, there has been a swift build-up along the Greek border with Former Yugoslav Republic of Macedonia (FYROM). Athens had previously warned that it could be stuck with up to 70,000 people trapped on its territory. Gerovassili said there were 25,000 migrants and refugees currently in the country and that FYROM was only allowing “a few dozen” through every day. Over 7,000 people – many of them stranded in near the Idomeni border crossing for days – spent a freezing night and awoke under wet canvas among sodden wheat fields.

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Feb 182016
 
 February 18, 2016  Posted by at 8:46 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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Russell Lee “Yreka, California, seat of a county rich in mineral deposits” 1942

Negative Interest Rates A ‘Dangerous Experiment’, Warns Morgan Stanley (MW)
Negative Interest Rates Are A ‘Gigantic Fiscal Failure’ (AEP)
Japan’s Exports Drop Most Since 2009 as Sales to China Fall (BBG)
Japan Shelves Plan to Let Pension Fund Directly Invest in Stocks (WSJ)
China’s Banks May Be Getting Creative About Hiding Their Losses (BBG)
China Central Bank Takes Another Step To Guide Interest Rates Lower (BBG)
High Chance of China Hard Landing, Says Adviser to Japan’s Abe (BBG)
Why the Chinese Yuan Will Lose 30% of its Value (CHS)
China’s $600 Billion Subprime Crisis Is Already Here (BBG)
Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production (WSJ)
Less Than 4% Of World Oil Supply In The Red At $35/b (Platts)
Venezuela Lifts Gasoline Price by 6,200% and Devalues Currency by 37% (BBG)
The Real Crisis is for Bank Bonds, Not Banks (WSJ)
Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks (WSJ)
Banking Reform Is More Complex Than It Needs To Be (Chu)
Italy Would Veto Any Cap On Banks’ Government Debt Holding (Reuters)
German Central Bank Chief On Collision Course With Draghi Over QE (T.)
Russia Sues Ukraine in London High Court Over $3 Billion Default (BBG)
WikiLeaks Releases Classified Data On EU Military Op Against Refugee Flows (RT)
European States Deeply Divided On Refugee Crisis Ahead Of Summit (Guardian)

“..the “ECB is ready to do its part” and would “not hesitate to act” to crisis-proof the eurozone.” You don’t crisis-proof by creating a crisis.

Negative Interest Rates A ‘Dangerous Experiment’, Warns Morgan Stanley (MW)

After ECB chief Mario Draghi on Monday hinted more economic stimulus could be coming in March, expectations have risen that deposit rates will be pushed further into negative territory in a bid to fend off the impact from lower oil prices and world-wide economic jitters. While rate cuts usually are seen as a way to stimulate economic growth and weaken the currency, analysts at Morgan Stanley on Wednesday raised concerns that exactly the opposite would happen were the ECB to take rates even lower. Part of this is because investors already have rejigged their portfolios to account for the policy, they explained. Here’s the bank’s thinking:

“Further moves into negative rates will have much less of an impact on the euro, in our view, given that most of the portfolio adjustment is already complete. Rather, we are concerned it erodes bank profitability, creating other systemic risks,” they said in a note. “Could the most bullish ECB outcome be no rate cut?,” Morgan Stanley analysts asked. Calling negative interest rates a “dangerous experiment’, the economists argued such policy would erode bank profits 5%-10% and risk curbing lending across eurozone borders. European banks have already been off to a rough start to the year, down 21% on concerns about the fallout from negative rates, lackluster profits, tougher regulation and a slowdown in global growth. “The credit impulse has turned negative, new loan origination has slowed, and systemic stress in the financial system has risen,” the Morgan Stanley analysts said.

The comments come ahead of the ECB’s March 10 meeting, where investors increasingly are banking on some easing action. The central bank massively disappointed investors in December by introducing a smaller-than-expected rate cut and choosing not to pump more new money into the eurozone economy each month. But at the January meeting, Draghi opened the door for more easing if the economy and inflation showed no signs of improvement. Fast forward a few weeks, and markets have taken a serious beating as investors started to get really nervous about the impact of persistently low oil prices and a slowdown in the world economy.This didn’t go unnoticed by the ECB boss. At his quarterly hearing before the European Parliament on Monday he stressed the “ECB is ready to do its part” and would “not hesitate to act” to crisis-proof the eurozone.

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Negative rates and the war on cash.

Negative Interest Rates Are A ‘Gigantic Fiscal Failure’ (AEP)

[..] negative rates are a creeping threat to civil liberties since the only way to enforce such a regime over time is to abolish cash, for otherwise people will move their savings beyond reach. Mao Zedong briefly flirted with the idea during the Cultural Revolution in his bid to destroy every vestige of China’s ancient culture, but even he recoiled. The eurozone already plans to eliminate the €500 note – allegedly to hurt organized crime – and from there it is a slide down the scales to notes in daily use and then to curbs on quasi-money. It is a step to FDR’s gold embargo and Emergency Banking Act of 1933, when Americans were ordered to hand over their bullion or face 10 years in prison. One policymaker in Davos this year let slip that drastic action to scrap cash would be needed to fight a decade-long war against “secular stagnation” once rates test the limits of -1pc or -2pc.

The Bank of England’s Andrew Haldane floated the idea in a speech last September, suggesting that central banks may have to take radical action to circumvent the constraints of the “lower zero-bound”. Mr Haldane said NIRP reinforced by electronic money is a safer course than going down the “most slippery of slopes” by printing money to cover government spending. Here he is wrong. As Lord Turner argues, there is nothing inherently more slippery about direct monetary financing of fiscal stimulus than any other crisis measure. “Everything we are doing is risky,” he says. One can hardly claim that chronic use of QE to inflate asset prices and to stoke more credit is sound practice, or socially just. A monetary policy committee can calibrate what is judged to be the proper level of debt monetisation needed to avert deflation in exactly the same way as the MPC or the FOMC calibrate interest rates.

The money creation must be permanent to avoid “Ricardian Equivalence”, where people anticipate that more spending now merely mean more debt in the future. All debt accumulated by central banks under QE should be converted to perpetual non-interest bearing debt, and preferably burned on a pyre in public squares to the sound of trumpets to drive home the message that the debt has been eliminated forever. This will pre-empt the panic that might occur among investors and politicians should public debt ever cross some arbitrary totemic level. Any New Deal should be funded in the same way – partly or in whole – with the same vow that the debt will never be repaid. The money creation should continue at the therapeutic dose until the objective is achieved.

There is no technical objection to this form of “fiscal dominance”, as monetary guru Lars Svensson told the IMF forum. All that is missing is political will. Needless to say, the eurozone cannot venture down this path. Maastricht prohibits the ECB from overt financing of deficits and any such thinking in Frankfurt would lead to a court challenge and destroy German consent for monetary union. This augurs ill, because they will need it. Thankfully, those of us with our own currencies, central banks and fully sovereign governments always have the means to prevent the collapse of nominal GDP and to avert debt-deflation. We can run out of wit: we can never run out of monetary ammunition.

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Japan exports to China down 18%. Japan imports also down 18%. World trade falls off a cliff.

More numbers:

January Exports from Asia’s Largest Economies

Singapore -9.9%
China -11.2%
Japan -12.9%
Taiwan -13%
Korea -18.5%
Indonesia -20.7%

Japan’s Exports Drop Most Since 2009 as Sales to China Fall (BBG)

Japan’s exports fell for a fourth consecutive month and dropped the most since 2009, underscoring continued weakness in an economy that contracted in the final months of 2015. Exports to China, Japan’s largest trading partner, were down almost 18%, driving an overall decline of nearly 13% in the value of overseas shipments in January from a year earlier. Imports dropped 18%, leaving a 645.9 billion yen ($5.7 billion) trade deficit, the Ministry of Finance said on Thursday. Falling exports compound poor sentiment in Japan, where wage gains have stagnated, consumer prices are barely rising and households are reluctant to spend. This year stocks have plunged and the yen has gained more than 5% against the dollar amid concerns over China’s slowdown and U.S. growth.

This adds to worries about the seesawing nature of Japan’s economy between modest growth and contraction. “The environment for Japanese exports is looking bad as Japanese companies shift production abroad, the global economy slows and the yen strengthens,” said Yasunari Ueno at Mizuho. “It’s becoming clear that that there is no driver to support Japan’s economy.” While exports to China typically ease in the weeks before lunar new year holidays, and the break came earlier this year, shipments to Japan’s neighbor have dropped for six straight months. Part of the weakness in the export figure is also because Japanese companies received lower prices for sales of steel and chemical products amid the general downturn in commodity and energy markets, said Atsushi Takeda at Itochu in Tokyo.

By volume, exports fell 9.1% in January from a year earlier, the biggest drop since February 2013, while import volumes declined 5.1%. Earlier this week, GDP data showed the Japanese economy shrank an annualized 1.4% in the three months ended Dec. 31. After that, Nomura cut its forecast for Japan’s fiscal 2016 GDP to 1% from a previous projection of 1.4%. The firm sees a high chance that the Bank of Japan will expand monetary stimulus at its March meeting if the market turmoil continues. Itochu’s Takeda doesn’t think it is likely that Japan will fall into a recession though he said “there are growing downside risks to the economy.” “Should gains in the yen and declines in stocks continue, they may take a toll on capital spending, exports and consumption,” he said.

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A sign of Abe’s waning clout?!

Japan Shelves Plan to Let Pension Fund Directly Invest in Stocks (WSJ)

Japan’s government has put off a plan to let its $1.1 trillion public pension fund buy and sell stocks directly, following criticism that the move could lead to excessive state influence on the market. The decision dashes the hopes of the Government Pension Investment Fund’s chief investment officer and some foreign money managers who believed that a direct role in the stock market could make the fund a more effective investor and improve corporate governance in Japan. A committee in Prime Minister Shinzo Abe’s ruling Liberal Democratic Party decided Tuesday to postpone consideration of the issue for three years, said LDP lawmaker Shigeyuki Goto, the committee’s secretary-general. “There won’t be any in-house stock investing, but it remains to be debated in the future,” Mr. Goto said. “The stock issue was the biggest sticking point for those involved in the discussions.”

The GPIF currently outsources decisions on its nearly ¥60 trillion ($520 billion) stock portfolio to more than a dozen outside asset managers. It handles domestic bonds in-house. Mr. Abe’s government has pushed to make the GPIF a more sophisticated investor in line with its overseas peers. The fund has moved more money into stocks and foreign bonds. Yet opposition from business and union leaders shows concern about allowing too much change at the GPIF, whose investment decisions ultimately affect how much Japan’s pensioners can receive. Recent market turmoil has made the fund a politically sensitive subject. The GPIF was criticized by opposition politicians after losing nearly ¥8 trillion in the third quarter of 2015 as global stock prices fell, and it is expected to post more losses in the coming months.

Mr. Abe was asked about the issue in parliament Monday and responded, “If expected returns aren’t met, that will of course impact pension payments.” Japan’s leading business group, Keidanren, as well as Rengo, an umbrella group for labor unions, both opposed letting the fund directly invest in stocks. They expressed concern about the GPIF being used to influence management at Japanese companies by using its voting rights as a shareholder. “It’s a very serious issue if the GPIF were to become a direct shareholder,” said Keidanren official Susumu Makihara at a meeting to debate the change in January. He said “a massive state organization would become a market player” under the proposal and it wasn’t clear how it would use its clout at companies.

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“We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.” Well, they would like to, but can they?

China’s Banks May Be Getting Creative About Hiding Their Losses (BBG)

Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank estimates may result in losses of as much as 1 trillion yuan ($153 billion) over five years. Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits. The German bank’s forecast is based on total outstanding receivables of around 11.5 trillion yuan. “Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,” said Xuanlai He at Commerzbank. “The eventual losses will have significant impact on China’s economy because you could have contagion risk in banking sector.”

Official data show nonperforming loans at Chinese commercial banks jumped 51% last year to a decade-high of 1.27 trillion yuan amid a stock market rout and the worst economic growth in a quarter century. While Moody’s Investors Service doesn’t expect a banking crisis in China in the next 12 to 18 months, it said in a Jan. 26 note that it does see higher loan delinquencies, more defaults on corporate debt and some losses in wealth-management products. “The receivables portfolio in Chinese banks is opaque so we can’t make an assumption on the asset quality,” said Christine Kuo, analyst at Moody’s in Hong Kong. “Provisions for receivables are indeed very low compared to that for loans. We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.”

China CITIC Bank’s assets under receivables tripled to 900 billion yuan by June 30, from 300 billion yuan at the end of 2013, according to the bank’s financial statements. Concerns about Chinese banks’ creditworthiness are mounting with the cost of insuring Industrial & Commercial Bank of China’s debt against default reaching an all-time high of 199.5 basis points on Jan. 21. The bank’s 6% perpetual notes that count as Additional Tier 1 capital fell to a record low of 99.5 cents last Thursday. The securities traded at 102.5 cents on the dollar Wednesday. The yield spread on China CITIC’s $300 million 6% 2024 notes surged to a one-year high of 336 basis points over U.S. Treasuries Wednesday.

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How afraid is Beijing of deflation? Apparently enough to blow another bubble.

China Central Bank Takes Another Step To Guide Interest Rates Lower (BBG)

China’s central bank took another step to guide interest rates lower, offering to reduce the medium-term borrowing cost it charges lenders in the second such move this year. The People’s Bank of China has told banks it can provide cash through its Medium-term Lending Facility at 2.85% for six-month loans, down from 3%, according to a person with direct knowledge of the matter. The one-year borrowing rate would be eased to 3% from 3.25%, according to the person, who asked not to be identified because the plans aren’t public. Such a reduction would amount to a kind of monetary easing outside of traditional tools such as lowering benchmark lending or deposit rates or the reserve-requirement ratio for the biggest banks.

Overuse of RRR cuts may add too much pressure on short-term interest rates and would therefore be bad for stabilizing capital flows and the exchange rate, PBOC researcher Ma Jun said in a China Business News report published last month. “The PBOC is trying to find ways for monetary easing without making a high-profile interest-rate cut,” said Louis Kuijs at Oxford Economics in Hong Kong. “There’re likely to be more following steps in a similar direction, since a single move will not be enough to turn around the momentum of the economy.” China’s consumer price index climbed 1.8% in January from a year earlier, the National Bureau of Statistics said on Thursday. That was below the medium estimate of 1.9%.

The producer-price index fell 5.3%, extending declines to a record 47 months. “The data show that the economy is pretty weak,” said Larry Hu at Macquarie Securities in Hong Kong. The central bank is attempting to square the circle of supporting growth without using up limited monetary policy space or putting more downward pressure on the yuan, said Bloomberg Intelligence economist Tom Orlik. “That means more use of low-visibility instruments like the MLF to guide rates lower, rather than cuts in benchmark rates,” he said. “The trade off for low visibility, is the confidence boosting effect on the market is reduced.”

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Very high.

High Chance of China Hard Landing, Says Adviser to Japan’s Abe (BBG)

The chances are high China will have a hard landing, and it must undergo a severe adjustment period, an economic adviser to Japanese Prime Minister Shinzo Abe said. “There’s a high possibility of a hard landing in China” as its economy is oversupplied and adjusting demand and supply will cause a shock, Etsuro Honda said in an interview late Tuesday in Tokyo. The problem is more acute as “China can’t use monetary policy for quantitative easing as it has been used to stabilize its currency.” While officials from the IMF to the Bank of Japan have said China will avoid an economic crash, Honda’s comments echo concerns among investors about the direction of China’s economy.

A surprise currency devaluation, the slowest growth in a quarter century and perceived policy missteps are raising anxiety about the world’s second-largest economy. Unlike the idea of capital controls suggested by BOJ Governor Haruhiko Kuroda, Honda recommended China adopt a floating exchange rate system. Otherwise, China’s economy will suffer from a problem of oversupply for quite a while, he said. Honda, 61, is an academic and has been an adviser to Abe for the past three years. “I really don’t think that China’s economic fundamentals are good and it’s just real estate markets and stock markets that are panicking,” Honda said. “China has to go through massive structural reforms and its impact on other economies is quite large. That’s different from other nations.”

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The yuan has turned toxic.

Why the Chinese Yuan Will Lose 30% of its Value (CHS)

The U.S. dollar has gained over 35% against major currencies since 2011. China’s government has pegged its currency, the yuan (renminbi) to the USD for many years. Until mid-2005, the yuan was pegged at about 8.3 to the dollar. After numerous complaints that the yuan was being kept artificially low to boost Chinese exports to the U.S., the Chinese monetary authorities let the yuan appreciate from 8.3 to about 6.8 to the dollar in 2008. This peg held steady until mid-2010, at which point the yuan slowly strengthened to 6 in early 2014. From that high point, the yuan has depreciated moderately to around 6.5 to the USD. Interestingly, this is about the same level the yuan reached in 2011, when the USD struck its multiyear low.

Since 2011, the USD has gained (depending on which index or weighting you choose) between 25% and 35%. I think the chart above (trade-weighted USD against major currencies) is more accurate than the conventional DXY index. Due to the USD peg, the yuan has appreciated in lockstep with the U.S. dollar against other currencies. On the face of it, the yuan would need to devalue by 35% just to return to its pre-USD-strength level in 2011. This would imply an eventual return to the yuan’s old peg around 8.3–or perhaps as high as 8.7.

[..] Here’s the larger context of China’s debt/currency implosion. From roughly 1989 to 2014 -25 years- the “sure bet” in the global economy was to invest in China by moving production to China. This flood of capital into China only gained momentum as the yuan appreciated in value against the USD once Chinese authorities loosened the peg from 8.3 to 6.6 and then all the way down to 6 to the dollar. Every dollar transferred to China and converted to yuan gained as much as 25% over the years of yuan appreciation. Those hefty returns on cash sitting in yuan sparked a veritable tsunami of capital into China. Now that the tide of capital has reversed, nobody wants yuan: not foreign firms, not FX punters and not the Chinese holding massive quantities of depreciating yuan.

This is why “housewives” from China are buying homes in Vancouver B.C. for $3 million. That $3 million could fall to $2 million as the yuan devalues to the old peg around 8.3 to the USD. Who’s left who believes the easy money is to be made in China? Nobody. Anyone seeking high quality overseas production is moving factories to the U.S. for its appreciating dollar and cheap energy, or to Vietnam or other locales with low labor costs and depreciated currencies. For years, China bulls insisted China could crush the U.S. simply by selling a chunk of its $4 trillion foreign exchange reserves hoard of U.S. Treasuries.

Now that China has dumped over $700 billion of its reserves in a matter of months, this assertion has been revealed as false: the demand for USD is strong enough to absorb all of China’s selling and still push the USD higher. The stark truth is nobody wants yuan any more. Why buy something that is sure to lose value? the only question is how much value? The basic facts suggest a 30% loss and a return to the old peg of 8.3 is baked in. But that doesn’t mean the devaluation of the yuan has to stop at 8.3: just as the dollar’s recent strength is simply Stage One of a multi-stage liftoff, the yuan’s devaluation to 8 to the USD is only the first stage of a multi-year devaluation.

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“China’s bad loans have grown 256% in six years even as their ratio to total lending dropped.”

China’s $600 Billion Subprime Crisis Is Already Here (BBG)

Sorry, Kyle Bass, you’re a bit late to the game. The debt problem in China has already reached the proportions of the U.S. subprime mortgage debacle. Don’t worry, though: Chinese authorities are on the case – discussing reducing the required coverage for bad loans so that banks can keep booking profits and lending. Including “special-mention” loans, which are those showing signs of future repayment risk, the industry’s total troubled advances swelled to 4.2 trillion yuan ($645 billion) as of December, representing 5.46% of total lending. That number is already higher than the $600 billion total subprime mortgages in the U.S. as of 2006, just before that asset class toppled the world into the worst financial crisis since 1929.

The amount of loans classed as nonperforming at Chinese commercial banks jumped 51% from a year earlier to 1.27 trillion yuan by December, the highest level since June 2006, data from the China Banking Regulatory Commission showed on Monday. The ratio of soured debt climbed to 1.67% from 1.25%, while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses, weakened to 181% from more than 200% a year earlier. The news looks to have scared Chinese authorities into reacting. Note that they aren’t curbing the ability of Chinese banks to lend or asking them to write off bad credit. Instead they’re considering putting aside checks already in place that are aimed at ensuring the health of the financial system: by reducing the ratio of provisions that banks must set aside for bad debt, currently set at a minimum 150%.

Perhaps, they’re hoping banks will lend even more if they ease the rules. That’s one way to keep the ratio of nonperforming loans under control. As the denominator increases the ratio remains steady or even drops. The absolute number of bad loans, however, keeps swelling. Guess what? Banks are lending more. China’s new yuan loans jumped to a record 2.51 trillion yuan in January, the People’s Bank of China reported on Tuesday. Aggregate financing, the broadest measure of new credit, also rose to a record, at 3.42 trillion yuan. China’s bad loans have grown 256% in six years even as their ratio to total lending dropped. The true amount of debt that isn’t being repaid is open for debate.

One example of how the data can be distorted: Banks are making increasing use of their more opaque receivables accounts to mask loans and potential losses. Still, adding special-mention loans to those classed as nonperforming gives some measure of the size of the bad-debt problem. Unfortunately, the CBRC started to publish special-mention loan numbers only last year, so it’s hard to put them in historical context. The dynamic is clear. A splurge of new lending can help to dilute existing bad loans, but only at a cost. This is a game that can’t continue forever, particularly if credit is being foisted on to an already over-leveraged and slowing economy. At some point, the music will stop and there will have to be a reckoning. The longer China postpones that, the harder it will be.

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Selling at a loss is often preferable over not selling at all, because of sunk costs or expected restart costs.

Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production (WSJ)

More than one-third of oil and natural-gas producers around the world are at risk of declaring bankruptcy this year, according to a new report from Deloitte. Oil prices have plunged from more than $100 a barrel in mid-2014 to about $30 a barrel today. Yet just 35 so-called exploration and production companies filed for bankruptcy between July 2014 and the end of last year, Deloitte says. Most producers managed to stay afloat by raising cash through capital markets, asset sales and spending cuts. Those options are running out.

The only moves left for most producers are dividend cuts and share buybacks, Deloitte says. The firm estimates that 175 companies, or 35% of the E&Ps listed world-wide, are in danger of declaring bankruptcy this year. The conundrum for many investors is that a slew of bankruptcies won’t necessarily shrink the global glut of crude. Companies need cash to repay their debts, so their existing wells are unlikely to stop operating throughout the bankruptcy process. In fact, those wells will probably be sold to better-financed buyers, who can afford to keep production going or even increase it.

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“Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.” (h/t ZH)

Less Than 4% Of World Oil Supply In The Red At $35/b (Platts)

Fears of a deepening non-OPEC supply crunch in response to the latest oil price slump may be overdone as many producers are absorbing short-term losses in the hope of a price rebound, according a new study by research group Wood Mackenzie. Citing up-to-date analysis of production data and cash costs from over 10,000 oil fields, Wood Mac said it believes 3.4 million b/d, or less than 4% of global oil supply, is unprofitable at oil prices below $35/b. Even the majority of US shale and tight oil, which has been under the spotlight due to higher-than-average production costs, only becomes cash negative at Brent prices “well-below” $30/b, according to the study.

For many producers, being cash negative is not enough of an incentive to shut down fields as restarting flow can be costly and some are able to store output with a view to selling it when prices recover. “Curtailed budgets have slowed investment, which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons,” Wood Mac’s vice president of investment research Robert Plummer said in a note. “Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.” Even since oil prices began sliding in late 2014, there have been relatively few outright field production halts due to low prices, with only around 100,000 b/d shut in globally, according to the study.

Despite widespread fears of a major supply collapse, the US’ shale oil output since late 2014, sharp deflation in service sector costs and greater drilling efficiencies have seen shale oil output remain more resilient to lower prices than first thought. Wood Mac said falling production costs in the US over the last year have resulted in only 190,000 b/d being cash negative at a Brent price of $35/b. The latest study contrasts with a similar report from the research group a year ago when it estimated that up to 1.5 million b/d of output – focused in the US – was vulnerable to being shut in at $40/b Brent.

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Count the failed states the west has created.

Venezuela Lifts Gasoline Price by 6,200% and Devalues Currency by 37% (BBG)

Venezuela hiked gasoline prices for the first time in almost two decades and devalued its currency as President Nicolas Maduro attempts to address triple-digit inflation and the economy’s deepest recession in over a decade. The primary exchange rate used for essential imports, such as food and medicine, will weaken to 10 bolivars per dollar from 6.3, Maduro said in a televised address to the nation. The government will also eliminate an intermediate rate that last sold dollars for about 13 bolivars and improve an alternative “free-floating, complementary” market that trades around 203 bolivars per dollar. The devaluation will ease the drain on government coffers by giving state oil company Petroleos de Venezuela more bolivars for each dollar of oil revenue, while higher gasoline prices will reduce expenditure on subsidies.

At the same time, the devaluation will probably force the government to raise the cost of staple foods such as rice and bread that most of the country now depends on to eat. “Faced with a criminal, chaotic inflation induced a long time ago, we must act with the power of the state to control and regulate markets,” Maduro said below a portrait of South American independence leader Simon Bolivar. While Maduro’s measures may fall short of fully addressing Venezuela’s ailing economy, the announcements may “bring some relief that it’s something after months (years) of nothing,” Sibohan Morden at Nomura Securities said in a note to clients published prior to Maduro’s speech. “It is also important that Chavismo shifts toward pragmatism and finally realizes that the Bolivarian revolution has failed.”

Something had to change after the bolivar lost 98% of its value on the black market since Maduro took office in 2013. The government was hemorrhaging funds as it struggled to meet international debt obligations and maintain the supply of essential items amid the collapse in oil prices. By long subsidizing the cost of fuel, the government has ensured that Venezuelans enjoy the cheapest gasoline in the world. Gasoline prices on Thursday will leap more than 60-fold to 6 bolivars a liter from 9.7 centavos. That’s equal to about 11 U.S. cents per gallon using the weakest legal exchange rate of 202.94 bolivars per dollar, up from about 0.2 U.S. cents per gallon. The price of 91-octane gasoline will increase to 1 bolivar a liter from 7 centavos. Even after these increases, Venezuela still has the lowest gasoline prices in the world.

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Then again, they’re not separate entities.

The Real Crisis is for Bank Bonds, Not Banks (WSJ)

The fall from grace has been swift and hard. Buying high-yielding subordinated bank bonds that count toward Tier 1 capital was a hot trade in a world where investors were scrambling for yield. This is a case where markets have been their own worst enemy. European banks have been at the center of the recent market storm, with Deutsche Bank’s bonds particularly in focus. The move in prices has been big, even with a bounce in the last couple of days. Bank of America Merrill Lynch’s index of contingent capital bonds—popularly known as CoCos—has dropped 7.6% this year. Europe clearly has unresolved issues to address in its fragmented banking system. But this is hardly news. The issue lies more with the securities and the investors that hold them than the balance sheets of the banks that issued them.

The big risk that investors have woken up to isn’t that these bonds can be bailed-in if a bank hits trouble—it is that interest payments on them can be skipped under certain circumstances. In turn, falling prices have raised concerns that banks won’t exercise their option to redeem them at the first opportunity, requiring a further repricing downwards. That has upset the apple cart of what had become a so-called crowded trade—one that caught many investors’ imagination as central banks poured liquidity into markets. During the good times these instruments looked like more lucrative versions of safer, lower-yielding senior debt. But now their equity-like features have come to the fore. That is a big shift for holders to take on board and one that is unlikely to be reversed quickly.

In the meantime, it isn’t clear that there is a natural buyer for these securities. For those holders who wish to sell, that poses an immediate problem: there is no way out, and the turmoil may not be over yet. Longer term, the economics of these hybrid structures may depend on buyers seeing them as safe debt while issuers consider them as quasi-equity. If they are priced more like equity, they may not be so attractive to issuers. Regulators may have helped create an instrument that is only truly viable in fair-weather conditions.

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Kashkari seems to go mostly for the shock effect, and turns opaque as soon as he’s called on his words.

Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks (WSJ)

Q: You talk about higher capital requirements. How high should they be?

MR. KASHKARI: I don’t have a number in my head. I’ve seen some proposals for a 25% capital requirement. So leverage ratios, effectively, just to keep it simple, you know, 4:1. You know, I think that’s a place we could discuss. I don’t have that – I don’t have a magic number yet. And also, importantly, we’re not suggesting that we at the Minneapolis Fed necessarily have all the answers. What we’re trying to do is launch a process where we can bring all of these ideas out from across the country and give them the serious analysis and consideration that I feel like they deserve.

Because when I look at the Dodd-Frank Act – and I was – I had already left government by then – but from the outside, it appeared that the more transformational solutions were just taken off the table – like, OK, that’s too bold; let’s keep the financial system roughly in its current form, and let’s make it safer and stronger. And that’s not an irrational conclusion for legislators to have drawn at that time, because we were – the recovery was still so unclear. But here we are, six years later, the economy is a lot stronger than it was coming out of the crisis. In my judgment, we still have the problem of too-big-to-fail banks, and now feels like the right time to look at this again.

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That second graphic here is very scary. The UK banking sector is 480% of GDP. With a reserve requirement of 3%, tops.

Banking Reform Is More Complex Than It Needs To Be (Chu)

“All that is necessary for the triumph of evil is that good men do nothing.” There’s some uncertainty over whether Edmund Burke actually made this observation. But, regardless of its provenance, the wisdom merits a tweak for our times. Today the necessary condition for vested interests to prevail over the public interest is that good men don’t understand what the hell is going on. Something has happened in the UK banking reform debate. Sir John Vickers, a central figure in the Government’s post-crisis financial overhaul, has questioned whether the Bank of England’s latest proposals to shore up the sector go far enough. Yet this debate is perfectly impenetrable to the non-expert. Read the exchanges between Sir John and the Bank and you will soon slip into a numbing bath of acronyms and jargon from which you will very likely not resurface any the wiser.

G-SIBs, D-SIBs, SRBs, RWAs, Tier 1, Basel III, CoCos … These names will float across your vision, like the members of the world’s most boring rap group. You will read about the appropriate threshold for the activation of “a risk-weighted SRB rate of 3%” and the relevance of “counter-cyclical buffers” and, you will, quite understandably, conclude there is something better you could be doing with your time. But ignore the detail. This complexity is the outcome of years, perhaps even decades, of horse trading between bank lobbyists, regulators and politicians from all around the world. As a non-expert you’re not supposed to be able to follow it. It hasn’t been designed to confuse ordinary people. That’s just a happy side-effect (as far as the banks are concerned).

So clear it from your mind. Focus, instead, on the essentials. Banks are not as complex as they are made out to be by bankers and regulators. A bank has a balance sheet just like any other business. On the asset side of the balance sheet are its loans to customers. On the liabilities side are the current account deposits of customers, plus borrowings from the wholesale capital markets and, most importantly of all, the equity of its investors. The liabilities of a bank fund its assets. Equity is what gets eaten into first when a bank makes losses. If the equity is all used up, the bank is bust. And as we saw in 2008, that can mean taxpayers forced to step in to stop these institutions collapsing and taking the entire economy down with them. That’s why regulators must make sure banks have a sufficiently large tranche of equity financing on their balance sheets.

In support of his case Sir John has chosen to cite the analysis of the respected independent expert in finance, Anat Admati of Stanford University. This is interesting. Ms Admati has recommended that a private bank’s equity cushion should be equivalent to between 20 to 30% of its assets. So what would you guess is the current level of equity for banks being targeted by the Bank of England? 15%? 10%? Try 3%. Or 4% at most. And even Sir John’s report, despite his complaints today, only wanted banks to hold equity worth a maximum of around 4% of assets. Consider what this means: it implies that a mere 3 or 4% fall in the value of a bank’s assets would bankrupt it – and government ministers and regulators would, once again, need to consider whether to step in. To state what should be obvious: that’s not very much. And that simple ratio – known as the “leverage ratio” – should be focus of debate.

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Bye bye banking union. Renzi’s clear: clean up Deutsche first.

Italy Would Veto Any Cap On Banks’ Government Debt Holding (Reuters)

Italy would oppose capping banks’ holdings of domestic sovereign bonds, Prime Minister Matteo Renzi said on Wednesday, throwing down the gauntlet to European policymakers who are considering a cap to strengthen the euro zone banking system. The European Commission plans to review the current rules on banks’ exposure to their home countries’ debt as a way to reduce the risk that wobbly public finances might pose to a national financial system. “We will veto any attempt to put a ceiling on government bonds in banks’ portfolios,” Renzi told the upper house Senate. The European Central Bank’s chief supervisor has proposed a limit on national sovereign debt holdings at 25% of a bank’s equity, but the ECB vice president favours a risk-weighted approach.

Bond markets in Italy and Spain would likely see the biggest impact among major euro zone countries if a cap were imposed, as banks in both countries hold piles of state-issued bonds. Around €405 billion ($451 billion), or 21.6% of all Italian government debt, is owned by its banks. The 41-year-old prime minister said Italy would take a firm line on the issue, adding: “Rather than worrying about government bonds in the banks we should be strong enough to say that (banks elsewhere in Europe) hold too many toxic assets.” Renzi, who has recently taken several swipes at Germany’s banking sector, mentioned the case of Deutsche Bank, which said last week it would buy back more than $5 billion in senior debt.

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Plus ça change..

German Central Bank Chief On Collision Course With Draghi Over QE (T.)

Germany’s powerful central bank chief has said quantitative easing is no longer appropriate for Europe, putting Berlin on a collision course with the ECB over expanding stimulus measures to revive the single currency area. Jens Weidmann, head of the Bundesbank and a member of the ECB’s governing council, said QE was “no longer necessary” for the eurozone, despite the widespread expectation that more stimulus will be announced as early as next month. However, Mr Weidmann defended the ECB’s bond-buying scheme – launched in March last year – at a hearing at the German Constitutional Court on Tuesday, arguing that it did not contravene the principles of the German constitution. But his resistance to expanding QE suggests the ECB’s hawkish members are hardening in their stance against expanding the stimulus programme from its current €60bn a month.

Crucially, Mr Weidmann will not be able to take part in the March vote under the ECB’s rotating voting rules. The Bundesbank chief’s position is in stark opposition to that of ECB president Mario Draghi, who has repeated the central bank’s willingness to “do its part” to revive inflation and growth in the bloc as turmoil has engulfed global markets this year. Draghi’s failure to ramp up QE in December sent markets into a tailspin and has helped European equities plunge by as much 13pc this year. Mr Weidmann was speaking as a witness in front of Germany’s powerful constitutional court in Karlsruhe on Tuesday. The court – which has the power to strike down EU laws it deems incompatible with Germany’s supreme federal constitutional law – was meeting to consider the legality of the ECB’s landmark Outright Monetary Transactions scheme (OMT), first announced in 2012.

Mr Weidmann has been a vociferous opponent of OMT, which acts as a financial backstop for the euro’s distressed debtors but has never been deployed, arguing that it represents the illegal financing of government debt. But he refrained from repeating his criticisms on Tuesday, saying only that the QE measures were less “problematic” than the more ambitious OMT. ECB board member Yves Mersch said OMT was devised to “confront an extraordinary crisis situation” when the future of the eurozone was in doubt. “This crisis situation was characterised by massive distortions of the government bond market that developed their own momentum,” said Mr Mersch. “This in turn led to a disruption of the monetary policy transmission mechanism, which posed a threat for price stability.” The German court is not expected to make a formal ruling until later in the year.

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Ukraine has been turned into a failed state. Even if Russia wins in court, what are the odds it will ever be paid?

Russia Sues Ukraine in London High Court Over $3 Billion Default (BBG)

Russia said it filed a lawsuit against Ukraine in the High Court in London after the government in Kiev defaulted on $3 billion in bonds. Cleary Gottlieb Steen & Hamilton was hired to represent the government in Moscow in a case that will seek to recover the principal in full, $75 million of unpaid interest and legal fees, Russian Finance Minister Anton Siluanov said on Wednesday. The filing comes after Germany attempted to mediate talks between the two former-Soviet neighbors to try to reach an out-of-court settlement. “I expect that the process in the English court will be open and transparent,” Siluanov said. “This lawsuit was filed after numerous futile attempts to encourage Ukraine to enter into good faith negotiations to restructure the debt.”

The case brings to a head a standoff between the two countries after Russia declined to take part in a $15 billion restructuring that Ukraine negotiated with its other Eurobond holders last year. Siluanov reiterated that Russia was demanding better treatment than private creditors, which include Franklin Templeton, and wants to be treated as a sovereign debtor. Russia has to pursue legal action against Ukraine in the U.K. because the bond was structured under English Law. President Vladimir Putin bought the debt in December 2013 to bail out his former Ukrainian counterpart and ally, Viktor Yanukovych, just months before he was toppled and Russia annexed Crimea. The notes were priced to yield 5%, less than half the rate on Ukrainian debt at the time.

The filing poses another obstacle to Ukraine’s government as it faces political infighting that’s threatening to sink the ruling coalition and further stall a $17.5 billion IMF lifeline that the country needs to stay afloat. The IMF warned last week the aid package risked failure if the government doesn’t kick start an overhaul of its economy.

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The smugglers are by now better funded than the military.

WikiLeaks Releases Classified Data On EU Military Op Against Refugee Flows (RT)

WikiLeaks has released a classified report detailing the EU’s military operations against refugee flows in Europe. It also outlines a plan to develop a “reliable” government in Libya which will, in turn, allow EU operations to expand in the area. The leaked report, dated January 29, 2016, is written by the operation’s commander, Rear Admiral Enrico Credendino of the Italian Navy, for the EU Military Committee and the Political and Security Committee of the EU. The document gives refugee flow statistics and details of performed and planned operation phases of the joint EU forces operating in the Mediterranean. The report also places pressure on the responsible EU bodies to help speed up the process of forming a “reliable” government in Libya, which is expected to invite EU forces to operate within its territorial waters, and later give permission to extend EU military operations onshore.

“Through the capability and capacity building of the Libyan Navy and Coastguard we will be able to give the Libyan authorities something in exchange for their cooperation in tackling the irregular migration issue. This collaboration could represent one of the elements of the EU comprehensive approach to help secure their invitation to operate inside their territory during Phase 2 activities,” the document states. Admiral Credendino writes that the task force is ready to proceed to phase 2B despite political and legal challenges: “…We are ready to move to phase 2B (Territorial Waters) where we can make a more significant impact on the smuggler and traffickers business model.” “However, in order to move into the following phases we need to have a government of national accord with which to engage.” “A suitable legal finish is absolutely fundamental to the transition to phase 2B (Territorial Waters) as without this, we cannot be effective.”

“Central to this and to the whole transition to phase 2B, is an agreement with the Libyan authorities. Ultimately they have the casting vote on the legal finish which will in turn drive the transition to phase 2B and the appetite for Member States to provide assets. As a European Union, we must therefore apply diplomatic pressure appropriately to deliver the correct outcome,” the document states. The leak comes less than five months after it was reported that Operation Sophia would consist of 22 member states and 1,300 personnel which would board and seize suspect vessels in the Mediterranean. However, the document notes that when the operation progresses into phases 2B and 3, “the smugglers will again most likely adapt quickly to the changing situation. The primary concern for smugglers will likely remain to avoid being apprehended so they can continue their illegal activities.”

The operation’s objective is primarily to disrupt smuggling routes by human traffickers, rather than to stop migration flows, according to the European Union Institute for Security Studies, which wrote in a document that the operation began on July 27, 2015. The Institute noted, however, that there is a “real uncertainty on whether the operation will ever be able – for either legal or political reasons – to get to the core of its mandate, i.e. neutralising the smuggling networks through deterrence or open coercion, both off the Libyan coast and onshore.” It went on to note that regardless of the operation’s support for EU member states, only “a very few” are likely to “have the skills and experience for such missions, let alone the will.” It also stressed that the operation cannot be a “solution” to the refugee crisis, and that “no one in Brussels is contending that it could.”

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They can talk for years and still won’t agree. Sticks and carrots galore, but those don’t keep the EU together.

European States Deeply Divided On Refugee Crisis Ahead Of Summit (Guardian)

Europe’s deep divide over immigration is to be laid bare at an EU summit in Brussels on Thursday, with German chancellor Angela Merkel struggling to salvage her open-door policy while a growing number of countries move to seal borders to newcomers along the Balkan routes. A dinner debate on the migration crisis on Thursday evening will do little to resolve the differences, senior EU officials predict. Donald Tusk, the president of the European council, has avoided putting any new decisions on the agenda in an attempt to avoid fresh arguments. The leaders of four anti-immigration eastern European countries met in Prague on Monday and demanded alternative EU policies by next month.

Their plan amounts to exporting Hungary’s zero-immigration razor-wire model to the Balkans, sealing Macedonia’s border with northern Greece, and bottling up the vast numbers of refugees in Greece unless they are deported back to Turkey. Merkel, by contrast, is to lead a rival meeting of leaders of 10 countries on Thursday in an attempt to invigorate a pact with Turkey, which is aimed at trading money and refugee quotas for Ankara’s efforts to minimise the numbers crossing the Aegean to Greece. Merkel’s plan hinges on EU countries volunteering to take in quotas of refugees directly from Turkey. But even among her allies – a so-called coalition of the willing – support for the policy is fading. Austria, which is hosting Thursday’s meeting at its embassy in Brussels, announced much stiffer national border controls this week.

It has also told Brussels and Balkan governments that it could close its borders within weeks. France, also part of the coalition, announced that it would not participate in any new quotas system. “You can’t have 20 [EU] countries refusing to take in refugees,” said a European commissioner. But senior officials in Brussels admit that there is now a solid majority of EU states opposing Merkel. In a pre-summit statement to parliament in Berlin on Wednesday, Merkel stoutly defended the policies that are under fire at home and across Europe. Despite the problems, she said, 90% of Germans continued to support taking in people fleeing war, terror and persecution. “I think that’s wonderful,” Merkel said.

Her speech dwelt overwhelmingly on the faltering pact with Turkey, struck in November. Ahmet Davutoglu, the Turkish prime minister, is to attend the mini-summit in Brussels. The issue at the EU summit, Merkel said, will be whether to press ahead with the Turkey pact or whether to concentrate on the closed scenario of more fences and quarantining Greece.

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 February 11, 2016  Posted by at 9:56 am Finance Tagged with: , , , , , , , ,  2 Responses »
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Harris&Ewing National Capital digs out after storm Jan 14 1939

Europe Stocks Head for Worst Drop Since August as SocGen Plunges (BBG)
Hong Kong Stocks Fall 4% in Worst Start to Lunar New Year Since ’94 (BBG)
Yellen: Not Sure We Can -Legally- Do Negative Rate (CNBC)
How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower (BBG)
Kyle Bass Says China Bank Losses May Top 400% of Subprime Crisis (BBG)
Bass: China Banks May Lose 5 Times US Banks’ Subprime Losses (CNBC)
Germany’s DAX Is One Of The World’s Worst-Performing Stock Markets (BBG)
It’s A Bad Time To Be A Bank (Ind.)
European Banks Face More Energy Problems (CNBC)
Energy Debt Fuels Broader Malaise (BBG)
Is The Market In European Coco Bonds About To Pop? (Ind.)
Some Hedge Funds Want to Make Subprime Auto Loans Next Big Short (BBG)
The Mining Industry Makes Oil Giants Look Great (BBG)
Why Does the US Government Pursue Student Debtors in Prison? (BBG)
Notes from the Locked Ward (Jim Kunstler)
When Will the Rest of Europe Want Its Own ‘Brexit’? (BBG)
Will Greece Become a Refugee Bottleneck? (Spiegel)

I’d just written down as a comment on one of the other articles: “Beware French banks, and Santander et al. It’s far too quiet on that front.” And then I see this flash by at the last minute.

Europe Stocks Head for Worst Drop Since August as SocGen Plunges (BBG)

The relief rally of Wednesday stopped short, with European stocks falling for the eighth time in nine days, heading for their lowest levels since September 2013. Financial results missing projections at Societe Generale, Rio Tinto and Zurich Insurance are adding to growing concerns that the global economy is slowing down. Energy producers deepened their slide as oil fell further. The Stoxx Europe 600 Index lost 3.9% at 9:26 a.m. in London, with more than 580 of its shares slumping. Federal Reserve Chair Janet Yellen yesterday said the turbulence had “significantly” tightened financial conditions and that the central bank might delay planned interest-rate increases. That failed to halt a slide in U.S. stocks, which by the end of the day had erased all of their gains.

European shares have dropped 17% this year and reached their lowest levels since October 2013 on Feb. 9, before rebounding on Wednesday 1.9%. This week alone, the Stoxx 600 is heading for a 6.9% plunge, its worst since August 2011. With a valuation of 13.4 times estimated profits, the gauge is near a more than one-year low relative to the Standard & Poor’s 500 Index. At least four of the 10 worst-performing equity gauges among the 93 that Bloomberg tracks are from western Europe, with Germany’s DAX Index down 19% in 2016 and Italy’s FTSE MIB Index sinking 26%. While all industry groups have been suffering, banks have borne the brunt of the selloff – they’ve plunged 28% this year amid disappointing earnings results and worries over bad loans and creditworthiness. They extended their losses on Thursday, plunging 6% as a group.

European lenders are heading for their lowest levels since the beginning of August 2012 – right when they started to rally after European Central Bank President Mario Draghi pledged to save the euro. Now even speculation that he’ll step up support as soon as next month is doing little to calm the market. A measure of volatility expectations for the region’s stocks jumped 17% on Thursday, heading for its highest level since August. Societe Generale tumbled 12%, the most since 2011, after reporting that quarterly profit missed estimates as earnings at the investment bank fell and it set aside provisions for potential legal costs. While Italian and Greek lenders tumbled the most, Deutsche Bank, Credit Suisse and Standard Chartered were among the biggest decliners, down more than 6.5% each. They’re trading at their lowest prices since at least 1998.

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Beijing will need to move before the Monday Shanghai opening.

Hong Kong Stocks Fall 4% in Worst Start to Lunar New Year Since ’94 (BBG)

Hong Kong stocks headed for their worst start to a lunar new year since 1994 as a global equity rout deepened amid concern over the strength of the world economy. The Hang Seng Index slumped 3.9% as of 1:13 p.m. in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1%. The last time the gauge fell so much on the first day of the lunar new year, investors were worried about the health of former Chinese leader Deng Xiaoping. Lenovo and energy producers led declines after crude slumped 11% during the holidays, while jeweler Chow Sang Sang slid after riots in the Mong Kok district. Hong Kong’s benchmark equity gauge tumbled 12% this year through Friday amid concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings.

Tuesday’s violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian. “You can’t avoid a drop because everywhere has come down so much during this time and the same concerns are still there – oil price, global recession,” said Steven Leung at UOB Kay Hian. “The image of Hong Kong as a metropolitan city has been hurt quite seriously” by the rioting, he said. PetroChina tumbled 5.7%, while Cnooc, China’s largest offshore oil company, dropped 6.4%. HSBC slid 5.2%, heading for a six-year low. The Hang Seng China Enterprises Index retreated 4.8%, poised for its biggest loss since August. Mainland financial markets remain closed for holidays until Monday. Plunges in crude and concerns over the perceived creditworthiness of European banks has fueled uncertainty over the strength of the world economy this week. Oil fell below $27 a barrel in New York, compared with $31.72 a barrel at the close on Feb. 4.

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Hollow: “..we certainly recognize that global market developments bear close watching,..

Yellen: Not Sure We Can -Legally- Do Negative Rate (CNBC)

As whispers mount that the Fed could implement negative interest rates as a way to goose economic activity, Chair Janet Yellen said Wednesday the central bank has not completely researched whether that would be legal. During her semiannual congressional testimony, Yellen said the Federal Open Market Committee discussed charging banks to hold excess reserves at the Fed but never fully researched the issue. “We didn’t fully look at the legal issues around that,” she said. “I would say that remains a question that we still would need to investigate more thoroughly.” Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.

“There would seem to be increased fears of recession risks that is resulting in rising in risk premia. We’ve not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching,” she told the House Financial Services Committee. Her testimony comes as speculation grows that the Fed might consider implementing negative rates on what it pays on excess reserves. That would be one option the Fed would have should the current bout of economic softness intensify. “I do not expect the FOMC is going to be soon in the situation where it’s necessary to cut rates,” she said. “Let’s not forget, the labor market is continuing to perform well, to improve. I continue to think many of the factors holding down inflation are transitory. … We want to be careful not to jump to a premature conclusion about what’s in store for the U.S. economy.”

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No, this is no new normal, it’s still beyond crazy.

How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower (BBG)

There are “no limits” to how far central banks can ease monetary policy. That’s a recent declaration of both ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda, who have joined their counterparts in Denmark, Sweden and Switzerland in embracing interest rates of less than zero. In September 2014, when the ECB’s deposit rate was minus 0.2%, Draghi was saying “now we are at the lower bound.” As recently as December, Kuroda said “we don’t think we should institute” negative rates. The rethink is global, even in places where rates are still positive.

Bank of England Governor Mark Carney conceded in November that his benchmark could fall below the current 0.5% if needed, while Federal Reserve Vice Chair Stanley Fischer said last week that negative rates were “working more than I can say that I expected in 2012.” Citigroup Inc. economist Willem Buiter says even China could shift below zero next year. The worry had been that probing below zero risked hurting the profitability of lenders, forcing them to pass on the cost to borrowers. Other fears included bank and currency runs, the hoarding of cash or gridlocked money markets. Rather than spurring lending and spending as intended, subzero rates would become more a problem than solution. Such a concern could still flare up anew given the recent selloff in global bank stocks and fretting over financial titans such as Deutsche Bank.

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As I’ve repeatedly said: “The nation’s expanding shadow banking system [..] is where the first credit problems are emerging.”

Kyle Bass Says China Bank Losses May Top 400% of Subprime Crisis (BBG)

Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. Should the Chinese banking system lose 10% of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in equity vanish, Bass, the founder of Hayman Capital Management, wrote in a letter to investors obtained by Bloomberg. The world’s second-biggest economy may end up having to print more than $10 trillion of yuan to recapitalize banks, pressuring the currency to devalue in excess of 30% against the dollar, according to Bass. Bass, 46, scored big after betting against mortgages in 2007, racking up gains as the world’s largest banks wrote off more than $80 billion in subprime losses.

All his calls haven’t been as prescient. He revealed wagering on a collapse in Japan’s government-bond market in 2010, a short position that Bass later acknowledged that other bond investors had nicknamed “the widow maker.” “What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote in the letter. “Credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world.” Bass said his hedge fund has sold most of its riskier assets since the middle of last year to position itself for 18 months of “various events that are likely to transpire along this long road to a Chinese credit and currency reset.” In an e-mail, he said about 85% of his portfolio is invested in China-related trades.

“The problems China faces have no precedent,” Bass wrote in the letter. “They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.” [..] Bass estimates the Chinese economy actually expanded last year at a slower pace than reported, about 3.6%, according to the letter. He estimates that of China’s $3.2 trillion in foreign-exchange reserves, about $2.2 trillion are liquid. The banking system, which he estimates swelled 10-fold in assets over the last decade to more than $34.5 trillion, is fraught with risky products used by financial companies to skirt regulations, wrote Bass. The nation’s expanding shadow banking system – which he says has grown almost 600% in the last three years, citing UBS data – “is where the first credit problems are emerging.”

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A few more details.

Bass: China Banks May Lose 5 Times US Banks’ Subprime Losses (CNBC)

“China’s [banking] system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay,” he wrote. “Instead, load decisions are political decisions made by the state.” Add to this the danger posed by China’s shadow banking system – made up of instruments Bass claimed the country’s banks used to subvert restrictions on lending – and the upshot was there were “ticking time bombs” in China’s banking system, the hedge fund manager explained. “Chinese banks will lose approximately $3.5 trillion of equity if China’s banking system loses 10% of assets,” Bass wrote. “Historically, China has lost far in excess of 10% of assets during a non-performing loan cycle.”

He noted that U.S. banks lost about $650 billion of their equity throughout the global financial crisis. The letter said that the Bank for International Settlements (BIS) estimated that Chinese banking system losses from the 1998-2001 non-performing loan cycle exceeded 30% of GDP. “We expect losses in this cycle to exceed prior cycles. Remember, 30% of Chinese GDP approaches $3.6 trillion today,” he warned. Bass wrote that he expected the massive losses to force Beijing to recapitalize Chinese banks and sharply devalue the yuan. “China will likely have to print in excess of $10 trillion worth of yuan to recapitalize its banking system,” he said. “By the time the loss cycle has peaked, we believe the renminbi will have depreciated in excess of 30% versus the U.S. dollar.”

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Is you have the likes of VW and Deutsche listed….

Germany’s DAX Is One Of The World’s Worst-Performing Stock Markets (BBG)

A one-day rebound in German shares is doing little to extinguish concerns in what has become one of the world’s worst-performing stock markets. The DAX Index has tumbled 16% this year through Wednesday, posting a loss that exceeds declines in France, the U.K. and Switzerland by as much as seven %age points. It plunged another 3.1% at 9:40 a.m. in Frankfurt. Investors are taking money out of an exchange-traded fund tracking German shares at the fastest pace since August. Fears about Deutsche Bank’s creditworthiness this week added to growing worries over a slowing global economy. Because of Germany’s close ties to China, its biggest trade partner outside of Europe, the nation stands to lose more than others in the region.

Carmakers such as BMW, Volkswagen and Daimler have already tumbled more than 23% this year on weakening demand there. “Oil and China are still on fire and a cause for concern, but we’ve got other, more broad-based fires to be watching now, and Deutsche Bank is just one of them,” said Alex Neil, EFG Bank’s head of equity and derivatives trading in Geneva. “Whichever way you look at the global economy in the next few months, there are more attractive markets than Germany.” While only about a dozen out of 93 equity gauges tracked by Bloomberg have risen this year, Germany stands out for the extent of its losses. After being some of investor’s favorites in 2015, none of the 30 DAX shares rose this year. The gauge closed 27% below its April peak on Wednesday.

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Or a shareholder. A pension fund that holds ‘secure’ stocks.

It’s A Bad Time To Be A Bank (Ind.)

It’s a bad time to be a bank. Banking stocks have lost around a quarter of their value since the start of the year. Some are now trading around lows not seen since the financial crisis. Shares in Deutsche Bank and Unicredit have been particularly hard hit as investors have lost confidence. It took reports that Deutsche Bank was considering buying back some of its own bonds on Wednesday to scrape its share price off the floor. But the extent of the losses suggests that something much bigger than a loss of confidence in one or two banks is going on.

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Beware French banks, and Santander et al. It’s far too quiet on that front.

European Banks Face More Energy Problems (CNBC)

European banks appear to face greater long-term exposure to problems in the energy sector compared to U.S. banks, many of which have already shored up capital reserves for half of their energy debt portfolio. Numerous European banks have not yet seen their borrowers draw down much of the credit that has been allotted for them, or, even more perplexing to analysts and investors, aren’t saying what their exposure to commodity-sensitive credit is, or what has already been committed. At the Credit Suisse Financial Services Conference this week in Florida, several bank executives highlighted the total exposure of their balance sheets to energy debt, but also explained what%age of that exposure is made up of outstanding paper.

Wells Fargo CFO John Shrewsberry highlighted the bank’s $42 billion in total oil and gas credit in his presentation at the conference; 41% ($17.4 billion) is already outstanding. The lender already has prepared for losses in outstanding paper by setting aside $1.2 billion to offset credit losses. The difference between Wells’ energy exposure and many of its competitors is that much of the California-based bank’s paper is non-investment grade. But the finance chief doesn’t sound like he’s sweating it. “This is not new for Wells Fargo,” Shrewsberry said at the event, and he noted “most of these loans are senior secured credit facilities.” However, European banks may have an even greater need to shore up capital. Many have billions in energy credit still waiting to be drawn down, which in turn could impact how much reserves must be set aside to bolster against defaults.

Credit Suisse CEO Tidjane Thiam spoke at the conference run by his bank Wednesday, and explained that while the company’s total energy exposure represents $9.1 billion, only $2.4 billion (about a quarter) of that had been drawn down by borrowers. In a JPMorgan report, analysts highlighted energy exposure for banks including Barclays, Standard Chartered, Royal Bank of Scotland and BNP Paribas. All told, the banks’ commodity exposure represented nearly $150 billion, much of which is yet to be drawn down, according to the report. Deutsche Bank didn’t quantify what its full energy exposure is in its fourth-quarter results, although, according to S&P Global Market Intelligence analyst Julien Jarmoszko, the lender has a lower exposure than its bigger competitors.

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Chesapeake looks done.

Energy Debt Fuels Broader Malaise (BBG)

This will most likely go down as the year of the Great Energy Debt Crisis, a spiral that exacerbated an economic funk that roiled the world. Companies are starting to go bankrupt. Banks are preparing for losses tied to oil and gas loans. And bond markets have all but closed to energy companies, especially the lowest-ranked ones. Borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20% for the first time, exceeding the past peak of about 17% in 2008, Bank of America Merrill Lynch index data show. Moody’s expects the U.S. default rate to reach the highest in six years in 2016, and a growing pool of investment-grade energy debt will most likely be downgraded to junk in the near future.

Chesapeake Energy is fast heading toward default, with Standard & Poor’s calling its debt “unsustainable.” Bonds of California Resources, Linn Energy, Energy XXI, Chesapeake and EP Energy have all lost more than 75% since the end of July. Without a doubt, the relentless carnage in energy debt is spilling over into the broader market, especially as prices continue to plunge, with Goldman Sachs seeing the possibility of crude prices dropping below $20 a barrel after rising as high as $107 in 2014.An estimated $75.7 billion in value has been eliminated from the pool of U.S. energy-related junk bonds since the end of June. Those losses are reverberating through mutual funds and hedge funds, which enabled an unprecedented borrowing spree by these companies just years earlier and are now suffering the consequences.

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Financial innovation.

Is The Market In European Coco Bonds About To Pop? (Ind.)

In May last year Martin Taylor, the former chief executive of Barclays Bank, addressed a crowd of high-powered financiers in the ballroom of the InterContinental Park Lane hotel in London. Mr Taylor, an adviser to the Bank of England’s Financial Policy Committee and an influential voice on market risk, spoke darkly about his fears for Coco bonds, a quirky-sounding debt instrument launched in the wake of the financial crisis. “I talk to a group like this about credit matters with the greatest timidity. I am sure you are good citizens and desire to exercise exemplary scrutiny. But I wonder whether you will flip – like the holders of European sovereign bonds before 2010 – from believing all issuers equally safe to thinking many equally precarious when the sky next darkens,” he said.

Skies have not only darkened this week, but Mr Taylor’s words have a prophetic rings: investors have indeed flipped out with concern about Cocos after the German lender Deutsche Bank was forced to reassure investors it could meet interest, or coupon, payments on its Coco bonds. The move has stoked fears that something is rotten at the heart of the European banking sector and led many to question why Cocos – considered a silver bullet solution – have melted like their chocolate breakfast cereal namesake in the face of market turmoil. Cocos, formally known as contingent convertible bonds, were born out of the 2008 financial crisis as a solution for stricken banks without the need for a state bail-out.

They work quite simply on the surface: banks issue them to finance their business like normal bonds but they morph into equity if a bank’s capital falls below a certain threshold. This automatically reduces a bank’s debt and boosts its capital buffers at a time when external investors could be reluctant to inject new money. The flexibility removes some of the risk inherent in loading up bank balance sheets with debt. But herein lies the rub: how can a bank be flexible on debt obligations without spooking the market into thinking it is in trouble?

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Long overdue.

Some Hedge Funds Want to Make Subprime Auto Loans Next Big Short (BBG)

A group of hedge funds, convinced they have found the next Big Short, are looking to bet against bonds backed by subprime auto loans. Good luck finding a bank willing to do the trade. Money managers have looked at betting that subprime auto securities will tank for many of the same reasons that investors wagered against risky mortgage bonds in the run-up to the financial crisis: Loan volume has mushroomed in the last few years, lending terms have become looser and delinquencies are ticking higher. Mary Kane, an asset-backed securities analyst at Citigroup Inc., wrote in a note late last month that the bank has received “an explosion of calls” in recent weeks, after the movie “The Big Short” portrayed a group of traders that wagered against subprime bonds.

The demand now is coming from hedge funds that trade everything from stocks to bonds, analysts said. But many banks, including Bank of America and Morgan Stanley, are not interested in making the bet happen for clients, according to representatives of the firms. Some said they fear that helping clients wager against car loans would be bad for their reputation, and that new capital rules and other post-crisis regulations would make the transactions difficult or even impossible to put together. “Most trading desks just don’t take that kind of risk now,” said Mike Edman, a former Morgan Stanley executive who helped invent credit derivatives that helped Wall Street banks bet against subprime mortgage bonds.

At least one trading desk has done this sort of trade. Etai Friedman, who runs hedge fund Crestwood Advisors, said he was able to work with a salesman he had known for years to buy an option that performed well if a custom-made index of subprime auto bonds fell. Friedman declined to identify the bank that did the trade, on which he earned a 36% return, but said finding a dealer was hard. “A trade like this is just taboo now,” Friedman said. Banks’ reluctance to help investors bet against subprime auto loans signals that may be paying more attention to how their trades will play with regulators and in the media, after having been criticized for crisis-era transactions.

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They’re all still thinking in terms of short term cycles only.

The Mining Industry Makes Oil Giants Look Great (BBG)

When you find yourself in a hole, the saying goes, stop digging. A simple lesson that arguably has bypassed a mining industry that’s wiped out more than $1.4 trillion of shareholder value by digging too many holes around the globe. The industry’s 73% plunge from a 2011 peak is far beyond the oil industry’s 49% loss during the same time. Just how long it will take for the world to erode bulging stockpiles of metals, coal and iron ore was the central debate at the mining industry’s biggest investment conference in Cape Town this week, which attracted more than 6,000 top executives, bankers, brokers, analysts, miners and reporters. This year may be the worst yet with prices trending lower for longer, according to Anglo American CEO Mark Cutifani, who says his company should be better prepared “for the winter that inevitably comes after the summer.”

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Because it sees it as its duty to harass its citizens.

Why Does the US Government Pursue Student Debtors in Prison? (BBG)

For Cecily McMillan, getting mail while incarcerated was a complex project. Any letter that was sent to her went through a metal detector and was opened by correctional officers before landing in the mailroom, where she had a two-hour window to collect it on a good day, she said. McMillan was living in the Rikers Island facility, a city-run jail complex in Queens, N.Y., but that did not stop the clock on her student loan payments. McMillan was serving a 58-day stint for assaulting a police officer, who tried to remove her from Zuccotti Park on the night of March 17, 2012, when people had assembled to mark the Occupy Wall Street protests. Eight months after she was released, McMillan realized she had missed a letter from a government debt collector warning that one of her federal student loans was coming due.

She ended up defaulting on her loan, leading that debt to balloon 35% to more than $7,600. In all, she had more than $100,000 in student debt. Her experience helps to illustrate the persistence of student loans—the only form of consumer debt that can almost never be erased, even if you declare bankruptcy. While collectors for other types of loans also pursue debtors behind bars, federal student loans are different because the government is the collector, which means taxpayer money is spent trying to reach borrowers who cannot easily communicate with the outside world and have few opportunities to earn money to repay the debt. McMillan, for example, said she was making less than a dollar per hour at her job as a suicide-prevention aid worker at Rikers. The average federal prison worker makes about 92 cents per hour, according to the Economic Policy Institute.

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“..whoever occupies the White House in 2017 will preside over a financial debacle like unto nothing in scale that the world has ever seen before..”

Notes from the Locked Ward (Jim Kunstler)

Beyond all the political histrionics, is there not some broad recognition that whoever occupies the White House in 2017 will preside over a financial debacle like unto nothing in scale that the world has ever seen before? With all the reverberating side effects imaginable among the traumatized nations? Something wicked has been creeping through the stock markets since the year began. The velocity and damage are amping up. Credit default swap spreads are yawning like fault lines in a ‘quake. Bankers are watching their share prices collapse. It’s a wonder that panic has not already broken out.

This is not just about Wall Street and its counterparts in London, Shanghai, Tokyo, and Frankfurt. This is the financial world (and underworld) catching up with the Economy of Actual Stuff. In the USA, that economy has bled out like a hapless bystander with a sucking chest wound for the last eight years. Despite all the patriotic sanctimony on view at the Superbowl, the nation appears to be visibly cracking up, along with the fantasy of a permanent global economy. None of the desperate work-arounds since 2008 have worked around the predicaments of our time. Politics will not abide a rational journey out of our fatal hyper-complexity to something simpler and more consistent with the realities at hand. Expect more and greater craziness as the year lurches on.

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I can tell you when: when the economy deteriorates sharply. How does 2016 sound?

When Will the Rest of Europe Want Its Own ‘Brexit’? (BBG)

If David Cameron leaves next week’s European Union summit with a deal to overhaul the terms of Britain’s membership, many of his counterparts will breathe a sigh of relief – and dig out their own wishlists. As populist and anti-EU forces surge across the region, the prime minister’s ultimately successful strategy of issuing demands for change and threatening to leave if they’re not met has left an impression on his fellow leaders, two senior EU officials said. Some see his approach as a template for pushing their own causes, the officials said, asking not to be named because the discussions were private. “The fact David Cameron raised a number of concerns and these concerns have all been addressed is creating a political precedent,” said Vincenzo Scarpetta, policy analyst at the London-based Open Europe think tank.

“The British renegotiation has to be seen as a longer-term path – Cameron has raised existential questions about the future of the EU.” Europe’s economic foundations were fractured by the debt crisis and now over a million refugees are pulling at its social fabric, bolstering populist movements from Madrid to Helsinki and fanning anti-EU feeling in former Soviet-bloc nations. That ensures when Cameron pushes for an accord at the Feb. 18-19 summit diminishing some of the bloc’s influence over the U.K., the shockwaves could resonate far beyond the English Channel. “All eyes are on France,” said John Springford, senior research fellow at London’s Centre for European Reform. EU officials are keen on “sending signals” to National Front leader Marine Le Pen and the wider French electorate “that this trick won’t work,” because “if France goes euro-skeptic, the project is toast.”

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“..it would lead to “downright apocalyptic scenarios”: Greece would collapse within a few weeks..”

Will Greece Become a Refugee Bottleneck? (Spiegel)

At five o’clock in the morning last Tuesday: Macedonia has once again closed its border, and just a few hours later, chaos reigns. Eighty buses with 4,000 refugees have been stopped by the Greek police 20 kilometers from the frontier and they are now waiting in a gas-station parking lot. Bus drivers argue, refugees jostle on the overfilled lot and overwhelmed police officers yell orders. “Macedonia, Macedonia,” the people waiting scream, “open the border!” But today, the border remains closed to most people. And if it were up to Brussels and the Germans, it would remain that way – that is, to anyone not from Syria, Iraq or Afghanistan. Since mid-November, Macedonia has tightened its border controls and whoever isn’t from one these three countries is turned away. Now, many people’s dreams of Europe come to an end here, in Idomene.

For it has recently become clear that Turkey is both unable and unwilling to stop the flow of refugees. As a result, the EU is placing its bets on Macedonia, with a plan that has the support of European Commission President Jean-Claude Juncker. Last year, the majority of the over 850,000 refugees traveling along the Balkan route went through Macedonia. If authorities have their way, that will come to an end. “Macedonia is our second line of defense,” says a high-ranking EU official. Several EU states have approved the deployment of 82 officers in Macedonia with the task of improving border protection. Financial support is to follow. If Macedonia reduces the number of people it allows into the country, it will lessen the pressure on Germany and Austria. It will also mean that more people will stay in Greece – and, Brussels hopes, place additional pressure on Greece to better protect its borders.

Idomene is a case study of what would happen were Europe to seal its borders and shut down the Balkan Route, the path most migrants take on their way to Germany and the rest of Europe. The result would be a massive backup of hundreds of thousands of refugees in Greece. And this in a country that is in a deep recession, and where every fourth citizen is unemployed. It is a country where angry farmers, teachers, doctors, lawyers, taxi drivers and ferry workers — actually everyone — is opposed to the government’s austerity measures. And it is a country that is once again in danger of sliding into its next big political crisis. The country will face big problems if Prime Minister Alexis Tsipras can’t find a compromise with the country’s international creditors, who are pushing for tough reforms. Or if Greece is made to bear the burden of the refugee crisis.

[..] According to a report by the Gemeinsames Analyse- und Strategiezentrum illegale Migration (Joint Analysis and Strategy Center on Illegal Immigration), many refugees in Greece live on the streets, even children and neo-nazis periodically hunt them down. The conditions for many refugees in Greece are described by the German authorities as “inhumane.” And still, the country is potentially being turned into a giant refugee camp. According to a confidential memo from the German Foreign Office, a backup of refugees would “inevitably lead to uncontrollable humanitarian conditions and security problems within days.” Migration researcher Franck Düvell from Oxford University warns that it would lead to “downright apocalyptic scenarios”: Greece would collapse within a few weeks, he believes.

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